By Jennifer M. Paine
Attorney, Cordell & Cordell, P.C., Detroit office
It’s a big house, we’ll divide it up! You stay in your half, I’ll stay in mine! Walter and Anna argue as their house, and their marriage, fall to pieces around them.
Walter and Anna searched for a house but could not afford much. When Walter’s real estate friend offered them a beautiful mansion at a low price, the deal seemed too good to be true. It was. The second they moved in, the house fell apart – literally – around them. That antique wooden staircase? Hanging by planks. And the hot water in the claw-foot tub? Rusty muck. Not to mention the floors collapsing, the chimney caving, the garden sinking and Walter hanging between the upstairs and the downstairs, trapped inside a rug like a bottle stopper in a hole in the floor. And then came the sultry ex-husband, Max, to steal Anna away.
She says, with a pointed musician’s stare, the idea is ridiculous. But he says, with an equally pointed lawyer’s glare, they have no money not to.
This is a scene from The Money Pit, the 1986 comedy starring Tom Hanks and Shelley Long. It is a clever movie that dances seamlessly between real-life drama – divorce and finances – and outrageous comedy – exploding electrical wires, collapsing walls, slips and falls, and all. It is a great movie to entertain, whether you need a lighthearted moment in the midst of your court case or just something to do. But it speaks truth to divorced and separated, divorcing and separating couples, too.
In today’s downward economy, with home foreclosures having been at their highest, many couples face the predicament Walter and Anna faced. Their mortgages exceed their home’s value. They cannot afford to sell, but they cannot stand to live together. Neither wants to assume the mortgage debt. Or neither can. Like Walter and Anna, they ask what they can and should do. Here are some suggestions.
Pre-Marriage Property Problems
You owned your home prior to your marriage. You wrote the check for the down payment. You made every mortgage payment, kept the property taxes current, paid the utilities, funded the remodeling, even during your marriage. Only your name is on the title. So, the home is yours, right? After all, your spouse merely moved into it, your spouse’s name is not on the title, not a dime from your spouse went to it.
Not necessarily. “Title” to real estate is not the same as a “marital interest” in real estate. Title is the link between the person who owns property and the property itself – that is, it is the legal right establishing ownership. Marital interest, on the other hand, is a right to a share of the property. This may be a legal interest or an equitable interest depending on the statutes in your state. This marital interest is why, for example, a husband who is the “sole owner” on his home mortgage or deed can end up having to pay his wife half the value of home’s equity at divorce.
What rights you and your spouse have to your home and the property inside depend on the facts of your case. If you are divorced, then your divorce decree should state those rights. If you are separated but not divorced, you are in a precarious position. If you deny your spouse access to the house, you may deprive her or him of other personal property (this is a crime in some states) or paint yourself as the unreasonable spouse bent on doing no good in court. This tarnishes your credibility. But, your spouse may encumber property or sell it and conceal the profits if you let him or her inside.
Even if you owned your home prior to your marriage, your spouse will raise three arguments to take a share of it when you divorce:
1. The property is comingled. Commingled property is assets and debts that were nonmarital but which were traded in to acquire new property during the marriage, repaired or enhanced during the marriage with marital funds, or, in some states, treated as marital property by written agreement or use during the marriage. A good example is a classic car purchased as a bachelor that you remodeled during your marriage with money you earned at work and deposited into a joint bank account. The statutes and case law in your state will dictate the extent, if any, your court will separate the marital from the nonmarital components of the property. Some courts refuse to do any separating, reasoning that the nonmarital property lost its status forever as soon as marital property mixed with it. Other courts will attempt separate valuations if the evidence presented is sufficient. A skilled attorney and expert testimony from an appraiser are essential here. The valuation is more difficult if the period of time of the comingled status is lengthy or the circumstances in which the property became comingled are complex. Do a cost-benefit analysis with your attorney to determine whether the fees you spend to prove the separate, nonmarital valuation are worth the anticipated value you will retain.
2. The property appreciated during the marriage. Appreciation is the property’s increase in value. During the marriage, the appreciation may be passive or active. Passive appreciation is the increase in value due to the surrounding circumstances, not your conduct. Active appreciation, on the other hand, is the increase in value due to your contribution, such as remodeling, reinvesting, and so forth. In most states, passive appreciation is not marital property. However, active appreciation due to one or both spouse’s involvement during the marriage, financial or otherwise, is. For example, in Reeves v Reeves, 226 Mich App 490; 575 NW2d 1 (1997), the Michigan Court of Appeals held that real estate equity that accumulated before the parties’ marriage in a home and several rental properties the husband owned was the husband’s nonmarital property because he had supplied the down payment and the mortgage payments, but the real estate equity that accrued during the marriage was marital property subject to division because it was attributable to the parties’ use, remodeling and management during the marriage. In addition, the entire equity of a rental property the husband purchased prior to the marriage was his nonmarital property because the appreciation was “wholly passive,” due to neither his nor his wife’s activities during the marriage.
3. The property is invadable. Invadable property is one spouse’s property the court nonetheless divides because the facts and circumstances of the case, as applied to the law for invasion, justify division. Each state has a different invasion law, so be sure to research the laws in your state to determine what, if any, invasion will occur in your case. In general, however, the laws allow invasion if the other spouse “needs” a share of the property due to an inequitable division of marital property or other financially dire circumstances and/or the spouse contributed to the property’s acquisition, use or maintenance, such as by helping to remodel it.
If you are concerned about your rights to pre-marriage property, you should carefully document what property you believe is yours, when you acquired it, what you did with it during your marriage (encumbered it, remodeled it, used it together, etc), and your guesstimated value. This information will be helpful as you negotiate your divorce settlement. Be prepared to address the comingled, appreciated and invadable arguments. Create a timeline for the property. Obtain appraisals to support your arguments. Most of all, do a cost-benefit analysis to determine whether the attorney fees and costs you incur to keep your property yours is worth the value, financial and sentimental value alike.
Note: This is Part 1 of a two-part series. Click here to read Part 2.
Disclosure: To ensure compliance with requirements imposed by the IRS, be advised that any federal tax advice contained in this article was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Always consult a specialist for thorough tax advice.
Jennifer M. Paine is an Associate Attorney in the Detroit, Michigan office of Cordell & Cordell P.C. She is licensed to practice in Michigan, and has been admitted pro hac vice in Illinois, Ohio, and the United States Court of Federal Claims. Ms. Paine received her BA in English and Mathematics from Albion College and graduated Summa Cum Laude. She received her Juris Doctorate from MSU College of Law and graduated Summa Cum Laude.