Dividing Real Estate in Divorce
In a divorce, one of the most difficult issues is
often what happens to the house the family lives in or other real estate.
There are a number of options that must be
considered when determining how real estate is to be divided in a divorce. That
does not always mean that the real estate must be sold.
Determining Real Estate Value.
The first step in dealing with real estate issues
is to determine the value of the property. If the parties are unable to agree on
the current market value, there are several valuation methods that can be used.
- Tax Assessed Value. The tax assessed value
is usually not an accurate method to value real estate. tax valuations are
generally low by as mush as ten to twenty percent. If there is a dispute in
value, the tax assessed value is likely to be given little weight in Court.
- Appraiser. It is often most cost effective
to agree on a real estate appraiser to have a market valuation performed.
This service will often cost approximately $300 - $400.
- Realtor. A real estate valuation may also be
performed by a realtor at little to no cost. However, such valuations are
often less reliable than those performed by an appraiser since a realtor
performs an appraisal to maximize sale price and has less training than a
Real Estate Appraiser.
Equity is the true value of the asset of the
property to the parties. It is determined by subtracting the encumbrances
against the property from the Real Estate Value. Encumbrances may include any
loans secured against the property including mortgages, second mortgages, home
equity loans or secured lines of credit.
Under existing case law, costs associated with a
sale of the real estate are not usually deducted unless the home will actually
be sold as part of the divorce.
Determining Marital vs. Non-Marital Equity.
The next step is to determine what portion of
the equity is marital and what is non-marital. State laws vary broadly on this
issue. Some states, primarily those that we call equitable property states,
include in their statutes categories of assets that are not divided in a
divorce. These are called non-marital assets. Any non-marital assets that you
possess remain yours and any non-marital assets of your spouse remain the assets
of your spouse. In most cases, non-marital assets may include:
- Premarital. Any
asset acquired before the marriage (if the asset was encumbered by a loan
that was paid off during the marriage, it may only have a partial
- Prenuptial Exclusions.
An asset excluded by a valid prenuptial agreement;
- Personal Injury
Proceeds. Personal injury settlements are generally considered
personal to the injured party and are non-marital in nature;
Any proceeds or assets from an inheritance;
- Gifts. Any
asset acquired as a gift to one, but not both parties.
It is important to recognize that all assets are
considered part of the marital estate unless proven otherwise by a
"preponderance of the evidence." This places a significant burden on any person
making a non-marital claim.
It is essential that any and all documents
including documents of title, receipts, or canceled checks that support your
non-marital claims must be provided. Any failure to provide documentation may
result in the division of the asset in the divorce.
If one party had a non-marital asset and sold
that asset or traded it for another asset, in some states it is also possible to
trace that non-marital interest by showing a paper trail following the
non-marital proceeds into the new asset. The new asset, however, must be
something specifically identifiable, like a house, a car or perhaps an
Some states even offer a party with a non-marital
interest added value on that investment that is due to passive appreciation of
the asset. "Passive Appreciation" refers to the increase in the value of the
asset based on market fluctuations and which is not due to any work or
improvements made to the property during the marriage. Allowing a party to
claim a non-marital interest plus passive appreciation is adopted by only a
small number of states.
Minnesota offers a simple formula illustrating
how passive appreciation works. In Minnesota the Schmitz formula is used in
determining the marital versus non-marital interests in real estate. Since real
estate mortgages and other encumbrances against property are paid off over a
significant period of time, marital interests may be created in real estate that
was owned by one party before the marriage. As encumbrances are paid off during
the marriage, a marital interest is created.
The formula states that the proper calculation of
a non-marital interest may be derived by determining the ratio of equity to
market value at the time of the marriage and then using that same fraction to
determine non-marital interest at the time of divorce. For example, lets assume
a spouse owns a home prior to marriage and that home has a value of $100,000 at
the time of the marriage and that is encumbered by a mortgage of $75,000. The
$25,000 equity (the difference between the value and the encumbrance) becomes
the numerator in the Schmitz formula and the value of $100,000 becomes the
denominator. As a result, the non-marital interest is 25% of the home's value.
If the home appreciates to $200,000, the spouse with the non-marital interest
may claim the first $50,000 as the non-marital interest and any remaining equity
would be divided as marital.
The limitations of this formula are obvious.
First of all, it may be very difficult to determine with any degree of accuracy
the value of real estate at the time of marriage unless an appraisal is done at
that time. That value alone may become a contested issue that results in
litigation and testimony of experts.
Second, In many instances, mortgages are
refinanced after marriage, second mortgages and home equity loans may also be
incurred. These new debts may erase or partially erase a non-marital interest.
Third, the formula does not consider the effect
that capital improvements made during the marriage have on the real estate
value. Capital improvements that are made during the marriage and which increase
the value of the real estate may erode some of the non-marital interest
represented by the Schmitz formula.
Often, presenting a persuasive property case
depends on clear cut documentation, and expert testimony. The Minnesota State
Bar Association includes a
Formula Calculator on their web site to determine non-marital interest. Use
this calculator only while understanding its limitations as set out above. It is
important to consult with a lawyer regarding significant non-marital issues.
Dividing the Asset.
Once Marital versus non-marital interests are
determined, the parties may discuss a division of the asset.
It is important to recognize that being named on
the title and being named on the mortgage represent two very different
interests. A person whose name appears on a title is considered the legal owner
to any person seeking to purchase the property. A person whose name appears on
the mortgage, however, has no ownership interest in the real estate and simply
has a responsibility to pay the the debt secured on the homestead. Often
parties seek to have their name removed from the title believing that doing so
will mean that they are no longer a debtor on the mortgage. That is not
With that said, there are many ways to divide the
homestead or , more precisely, the homestead equity in a divorce.
one. If the real estate is awarded to
one of the parties, the other party must be compensated for their share of the
marital equity. This compensation may take one of several forms.
- Award of Other Assets. Try to think of the
property division as a spread sheet with three columns. In the first column,
list the asset. In the second column list the value of the asset awarded to
the husband and in the third column the value of any assets awarded to the
wife. If on party is awarded the real estate, their column will reflect the
marital equity awarded to them. This may be offset by other assets awarded
to the other party.
- Refinance Mortgage. When one party is
awarded real estate, the other party may remain obligated on any mortgage,
second mortgage or home equity loan if they were a signor on the loan. As a
result, in most instances the real estate mortgage must be refinanced to
remove the other party's name. As part of that refinancing, the party that
is awarded the real estate may seek additional funds to pay off the other
parties' equitable interest.
- Pay Off Over Time. A party's interest may
also be paid out over time with or without interest abs negotiated between
the parties. This is usually only used when there are no other assets that
can be used to equalize the property division. The pay off amount and period
may depend on the respective incomes of the parties.
Sale and Division of Proceeds.
When no other assets are available to equalize the division of property and
the parties are either unable to afford the real estate or unable to refinance
the real estate, the property may be sold and the proceeds divided.
- Immediate Sale.
Real Estate may be placed immediately on the market for sale with the
parties dividing the net proceeds realized from the sale. "Net
proceeds" are generally defined as the amount remaining after the following
costs have been subtracted from the sale price or appraised value of the
- Expenses of sale, which shall mean all
the usual and customary expenses of sale such as attorneys' fees,
points, broker's commissions, assessments, expenses of updating the
abstract, and other normal costs of closing;
- Any secured debt including any Mortgage,
second mortgage, home equity loan or secured line of credit;
- A credit payable to either party for the
amount of principal reduction made by him/her on the mortgage up to the
date of the sale.
- Sale in Future. The parties
may agree to sell the real estate at some point in the future. This may be
agreed upon to allow the party occupying the real estate to attempt to
repair credit and ultimately refinance the mortgage. It may also be agreed
upon to allow any minor children to remain in the homestead until some event
in the future. Without an agreement of the parties or some showing of
hardship, a Court is unlikely to require the party that is not occupying the
homestead to wait to receive his/her equity until the children are no longer
If one party occupies the homestead, that
party will generally be required by the Court to pay any secured
encumbrances against the homestead. That requirement by the Court, however,
is not binding on any creditors. As a result, if the person with occupancy
fails to pay, and the other party is still listed on the mortgage, that
person's credit may be affected and the creditor may seek collection against
either party. As a result, the party that is not occupying the homestead
will want to include language in the agreement of the parties and the final
order which protects his/her credit rating in the event that the occupying
party fails to pay the debts secured against the real estate.
There are many ways that this can be
accomplished including requiring that the home be sold should the occupant
fall behind on the mortgage, or allowing the party without occupancy to make
payment to protect their credit rating and to seek reimbursement plus fees
and costs against the other party.