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
- 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
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
The second step is to determine what
portion of the equity is marital and what is non-marital. Certain assets
may be excluded from the marital estate which means that they are not
divided between the parties. 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 . State laws differ on this issue. In Minnesota,
if the asset was encumbered by a loan that was paid off during the
marriage, it may only have a partial non-marital value. In
Wisconsin, however, premarital asets are not granted non-marital
status and can be divided;
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;
Inheritance. Any proceeds or assets
from an inheritance;
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.
Wisconsin has no specific formula that is
used to determine premarital value. That is because Wisconsin law does
not recognize a premarital asset as one that is non-marital. As a
result, even premarital assets are capable of division in a divorce.
However, Wisconsin statutes does allow each party to argue that their
contribution to a real estate asset was greater that their spouse and,
thus that they should receive a greater part of that asset in a property
By contrast, in Minnesota the Schmitz
formula is used in determining the marital versus non-marital interests
in real estate. The formula provides a simplistic model to help
determine 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
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.
Dividing the Asset.
Once Marital versus non-marital interests
are determined, the parties may discuss a division of the asset.
Occupancy/Ownership by 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
- 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.
See Figure 1.
- 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.
See Figure 2. You may
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- 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
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
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 homestead:
- 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
- Any secured debt including any
Mortgage, second mortgage, home equity loan or secured line of
- 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 minors.
If one party occupies the homestead,
that party is generally responsible for any secured encumbrances
against the homestead. Additionally, 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
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