A common scenario we see is a couple divorcing where the home they are living in was owned by one of them prior to the marriage and continues to be owned solely in that spouse’s name. Often, however, mortgage payments have been made during the marriage from marital funds. Sometimes marital funds have also been used to make improvements to the home. Almost always, the home has appreciated in value during the marriage.
In this situation, what happens to the house equity in the divorce? First, if the house is in one spouse’s name and was owned by that spouse before the marriage, the house is that spouse’s sole and separate property. The character of property is established at the time it is acquired, and that character generally does not change. This holds true with real estate. The real estate remains the separate property of the spouse who owned it before the marriage.
The mortgage payments paid with marital funds during the marriage, however, create a constructive lien against the home. Although it is not recorded like a written mortgage or deed of trust, the law establishes that the marital community has a claim against the house based on the principal paid on the mortgage during the marriage. The formula generally used to determine the amount of the marital lien against the sole and separate property home is characterized as C+[C/B x A], using the following values:
“A” = appreciation of the property during the marriage;
“B” = the value of the property as of the date of the marriage; and
“C” = the community’s contributions to the mortgage loan principal.
See Barnett v. Jedynak case. Under this formula, if the property has appreciated during the marriage, the marital community has a claim not only for its payments toward the principal on the mortgage but also for a portion of the during-marriage appreciation.
I believe this case represents an appropriate development in Arizona law. Allocating some, but not all, of the during-marriage appreciation to the marital community makes sense from a fairness perspective. The spouse who owned the property prior to the marriage should be awarded some of the during-marriage appreciation as her sole and separate property (a return on the property she owned before marriage), but when marital funds are used to make the mortgage payments during the marriage, the marital community should also receive some of the appreciation because its payments were responsible for keeping the house afloat as its value increased during the marriage.
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