Appreciation in Separate Real Property As Marital Property

The increase in value of a titled spouse's separate property is subject to equitable distribution as marital property “to the extent that such appreciation is due in part to the contributions or efforts of the other spouse.” D.R.L. ' 236 (B)(1)(d)(3).

The Court of Appeals has repeatedly determined that a broad interpretation be given to this exclusion so as to favor the inclusion of such appreciation as marital property: “We hold that under the Equitable Distribution Law an increase in the value of separate property of one spouse, occurring during the marriage and prior to the commencement of matrimonial proceedings, which is due in part to the indirect contributions or efforts of the other spouse as homemaker and parent, should be considered marital property Domestic Relations Law '236 (B)(1)(d)(3).” Price v. Price, 69 N.Y2d 8 (1986); see Majauskas v. Majauskas, 61 N.Y.2d 481 (1984) (the term “separate property” must be construed narrowly).

Note that the increase need not be entirely, or even mostly, due to the non-titled spouse; rather it ” … depends primarily upon the nature of the asset and whether its appreciation was due in some measure to the time and efforts of the titled spouse. If such efforts…were aided and the time devoted to the enterprise made possible, at least in part, by the indirect contributions of the nontitled spouse, the appreciation should, to the extent it was produced by the efforts of the titled spouse, be considered a product of the marital partnership and hence, marital property.” Id.

When dealing solely with indirect contributions of the nontitled spouse as a parent and homemaker, a court must pursue a two-step inquiry. Step one requires the court to determine whether the titled spouse contributed “in some measure” to the increase in value. Step two requires the court to determine if the non-titled spouse's efforts allowed the titled spouse to expend his or her time on appreciating the separate property. It is only where the parties contributed nothing to the increase in value — “where the appreciation is not due, in any part,” to the efforts of the titled spouse — that the increase remains separate property.

Nearly 10 years after Price, the Court of Appeals again affirmed that the increase in value to separate property is marital when the increase is in any part due to personal effort. Hartog v. Hartog, 85 N.Y.2d 36 (1995) (emphasizing that appreciation must be due in its entirety to others' efforts or market forces before increase can be removed from marital estate; even a “small degree” of effort renders the increase marital).

Major Significance in Current Real Estate Market

With the dramatic increase in the market value of residential and commercial real property, the issue concerning whether the appreciation is marital (in whole or in part) or separate is a critical one.

The attorney for the non-titled spouse must obtain valuations of the subject real property as of the following dates: the date of the parties' marriage, in order to determine the “baseline value”; the date of commencement, if the subject property is commercial real estate, which the titled spouse either manages or actively participates in managing; and the current market value, if the subject property is residential or investment commercial real property not actively managed by the titled spouse.

The real estate expert of the non-titled spouse must also be prepared to testify as to what portion of the appreciation in value is related to market factors as distinguished from improvements, renovations, management activities and other direct efforts or contributions by both the non-titled spouse and the titled spouse.

Burden of Proof

All of this raises the question: Which party has the burden of proof to establish what part of the appreciation is marital?

Normally, the party seeking to establish that a particular item is separate property bears that burden of proof. Seidman v. Seidman, 226 A.D.2d 1011, 1012 (3d Dept. 1996); Heine v. Heine, 176 A.D.2d 77, 83 1st Dept. 1992); Leroy v. Leroy, 274 A.D.2d 362 (1st Dept. 2000). However, the cases make is clear that the non-titled spouse cannot rely on this presumption and must offer testimony and proof of direct and indirect contributions. He or she must show, through a real estate expert, how those contributions increased the value of the separate real property.

The evidentiary showing that must be made is illustrated in Acosta v. Acosta, 301 A.D.2d 467, 468 (1st Dep't 2003), where the wife was able to establish both direct as well as indirect (as a parent and homemaker) contributions. There, the court held that based on the trial court's finding of credibility, the award to the wife of half the appreciation of the husband's separate property was appropriate. Contrary to the husband's self-serving and conclusory testimony, the increases in value were the result, at least in part, of the husband's efforts at repair and renovation and his long hours at his hardware store business, rather than market forces. The wife made a direct contribution through her labor, acting as the unpaid superintendent and janitor of one of the buildings and otherwise assisting the husband with respect to the husband's business in another; and through her homemaking and child caring services.

Where a lower court's determination is based upon an evaluation of the credibility of witnesses who gave sharply opposing testimony, an appellate court must give that determination due deference. Lauria v. Lauria, 187 A.D.2d 888 (3d Dept. 1992); Cohen v. Cohen, 279 AD2d 599 (2d Dept. 2001); Carniol v. Carniol, 306 AD2d 366 (2d Dept. 2003).

When an appropriate evidentiary showing is made, the non-titled spouse may well be awarded a share of the appreciation in the separate real property of the titled spouse. The First Department, for example, reversed a lower court's ruling that a building was a non-passive asset, then distributed one-half of the asset to the non-titled wife. Zelnik v. Zelnik, 169 A.D.2d 317 (1st Dept. 1991). The Zelnik court held that the rental apartment in question had been renovated, in part, by the wife. In addition, it found that she had assisted her husband's efforts toward increasing the apartments value by caring for the couple's child in order to free up his time. The Second Department reversed an order that determined the wife's share of out-of-state property was separate property because renovations were paid for with funds from a marital account. Imhof v. Imhof, 259 A.D.2d 666 (2d Dept. 1999). The First Department went even further in Spencer v. Spencer, 230 A.D.2d 645 (1st Dept. 1996) when, citing to Price, it awarded one-half of the increase to an admittedly separately maintained investment account and apartment house to the wife, reasoning that the wife's household efforts allowed her husband the time he needed to wisely invest. See also, Lukacs v. Lukacs, 238 A.D.2d 483, 657 N.Y.S.2d 191 (2d Dept. 1997) (ordering hearing to determine value of separate property and ruling that lower court correctly awarded one-third share of increase in separate property to wife who “contributed her efforts during the marriage”); Lagnena v. Lagnena, 215 A.D.2d 445 (2d Dept. 1995) (one-half of increase in wife's real estate awarded to husband due to his efforts in maintaining property); Derderian v. Derderian, 167 A.D.2d 158 (1st Dept. 1990) (upheld award from husband's real estate empire to wife based upon her “services as a homemaker” and “in maintaining and operating the real estate”); Lauria v. Lauria, 187 A.D.2d 888 (3d Dept. 1992) (where husband directly contributed to wife's house, court awarded him 40% of increase in value during marriage).

Conversely, courts have rejected this view where the party seeking to share in the increase in value of separate real property failed to provide evidentiary proof to support the claim. A recent Second Department case, Carniol v. Carniol, 306 AD2d 366 (2d Dept. 2003), demonstrates the high burden of proof required from the non-titled spouse. There, the lower court was reversed in its decision to include the appreciation in value of the marital residence as marital property. The husband had purchased the marital home before the marriage and it was clearly separate property. Since the wife failed to establish that the increase in value was attributable to the efforts of either party, “and since there is no causal connection between her contributions to the marital relationship and the appreciation of the marital home, the amount of such appreciation should be deemed separate property.”

Similar results were reached in other cases where there was a failure of proof. In Saslow v. Saslow, 2002 WL 32092474 (2d Dept. 2003), the Second Department reversed the lower court, which improperly determined that the appreciation in value of a commercial condominium in Manhattan was marital property. The appellate court found that the wife failed to prove any specific increase in value or that any increase was due in part to her contributions or efforts. The Second Department has shown skepticism in many other cases, such as Kraeger v. Kraeger, 271 A.D.2d 657 (2d Dept. 2000), in which the non-titled spouse got no award where market forces and maintenance increased the value, rather than renovations and spousal efforts; and Pulice v. Pulice, 242 A.D.2d 527 (2d Dept. 1997) and Feldman v. Feldman, 194 A.D.2d 207, 217, 605 N.Y.S.2d 777 (2d Dept.1993), in which no award was made to the non-titled spouse because the court could not determine how much the increase was for lack of an offer of baseline value. See also, Emaleh v. Emaleh, 184 A.D.2d 544 (2d Dept. 1992) (husband failed to rebut wife's experts' testimony that increase in value was due solely to market forces); Fitzgibbons v. Fitzgibbons, 161 A.D.2d 619 (2d Dept. 1990) (same).

Conclusion

The lesson to be learned from these appellate cases is that the non-titled spouse must offer proof of her direct and indirect contributions and testimony from a qualified real estate appraiser must be adduced to establish a causal connection between such contributions and the appreciation in the separate real property. This remains a difficult burden where the marital residence itself is involved and the non-titled spouse has made only indirect contributions as a spouse, parent and homemaker to the marital relationship. But with income property, the case law supports broader rights for the non-titled spouse, as long as proper proof of the non-titled spouse's contribution to increased value, either direct or indirect, is offered.

The increase in value of a titled spouse's separate property is subject to equitable distribution as marital property “to the extent that such appreciation is due in part to the contributions or efforts of the other spouse.” D.R.L. ' 236 (B)(1)(d)(3).

The Court of Appeals has repeatedly determined that a broad interpretation be given to this exclusion so as to favor the inclusion of such appreciation as marital property: “We hold that under the Equitable Distribution Law an increase in the value of separate property of one spouse, occurring during the marriage and prior to the commencement of matrimonial proceedings, which is due in part to the indirect contributions or efforts of the other spouse as homemaker and parent, should be considered marital property Domestic Relations Law ' 236 (B)(1)(d)(3).” Price v. Price , 69 N.Y2d 8 (1986); see Majauskas v. Majauskas , 61 N.Y.2d 481 (1984) (the term “separate property” must be construed narrowly).

Note that the increase need not be entirely, or even mostly, due to the non-titled spouse; rather it ” … depends primarily upon the nature of the asset and whether its appreciation was due in some measure to the time and efforts of the titled spouse. If such efforts…were aided and the time devoted to the enterprise made possible, at least in part, by the indirect contributions of the nontitled spouse, the appreciation should, to the extent it was produced by the efforts of the titled spouse, be considered a product of the marital partnership and hence, marital property.” Id.

When dealing solely with indirect contributions of the nontitled spouse as a parent and homemaker, a court must pursue a two-step inquiry. Step one requires the court to determine whether the titled spouse contributed “in some measure” to the increase in value. Step two requires the court to determine if the non-titled spouse's efforts allowed the titled spouse to expend his or her time on appreciating the separate property. It is only where the parties contributed nothing to the increase in value — “where the appreciation is not due, in any part,” to the efforts of the titled spouse — that the increase remains separate property.

Nearly 10 years after Price, the Court of Appeals again affirmed that the increase in value to separate property is marital when the increase is in any part due to personal effort. Hartog v. Hartog , 85 N.Y.2d 36 (1995) (emphasizing that appreciation must be due in its entirety to others' efforts or market forces before increase can be removed from marital estate; even a “small degree” of effort renders the increase marital).

Major Significance in Current Real Estate Market

With the dramatic increase in the market value of residential and commercial real property, the issue concerning whether the appreciation is marital (in whole or in part) or separate is a critical one.

The attorney for the non-titled spouse must obtain valuations of the subject real property as of the following dates: the date of the parties' marriage, in order to determine the “baseline value”; the date of commencement, if the subject property is commercial real estate, which the titled spouse either manages or actively participates in managing; and the current market value, if the subject property is residential or investment commercial real property not actively managed by the titled spouse.

The real estate expert of the non-titled spouse must also be prepared to testify as to what portion of the appreciation in value is related to market factors as distinguished from improvements, renovations, management activities and other direct efforts or contributions by both the non-titled spouse and the titled spouse.

Burden of Proof

All of this raises the question: Which party has the burden of proof to establish what part of the appreciation is marital?

Normally, the party seeking to establish that a particular item is separate property bears that burden of proof. Seidman v. Seidman , 226 A.D.2d 1011, 1012 (3d Dept. 1996); Heine v. Heine, 176 A.D.2d 77, 83 1st Dept. 1992); Leroy v. Leroy , 274 A.D.2d 362 (1st Dept. 2000). However, the cases make is clear that the non-titled spouse cannot rely on this presumption and must offer testimony and proof of direct and indirect contributions. He or she must show, through a real estate expert, how those contributions increased the value of the separate real property.

The evidentiary showing that must be made is illustrated in Acosta v. Acosta , 301 A.D.2d 467, 468 (1st Dep't 2003), where the wife was able to establish both direct as well as indirect (as a parent and homemaker) contributions. There, the court held that based on the trial court's finding of credibility, the award to the wife of half the appreciation of the husband's separate property was appropriate. Contrary to the husband's self-serving and conclusory testimony, the increases in value were the result, at least in part, of the husband's efforts at repair and renovation and his long hours at his hardware store business, rather than market forces. The wife made a direct contribution through her labor, acting as the unpaid superintendent and janitor of one of the buildings and otherwise assisting the husband with respect to the husband's business in another; and through her homemaking and child caring services.

Where a lower court's determination is based upon an evaluation of the credibility of witnesses who gave sharply opposing testimony, an appellate court must give that determination due deference. Lauria v. Lauria , 187 A.D.2d 888 (3d Dept. 1992); Cohen v. Cohen , 279 AD2d 599 (2d Dept. 2001); Carniol v. Carniol , 306 AD2d 366 (2d Dept. 2003).

When an appropriate evidentiary showing is made, the non-titled spouse may well be awarded a share of the appreciation in the separate real property of the titled spouse. The First Department, for example, reversed a lower court's ruling that a building was a non-passive asset, then distributed one-half of the asset to the non-titled wife. Zelnik v. Zelnik , 169 A.D.2d 317 (1st Dept. 1991). The Zelnik court held that the rental apartment in question had been renovated, in part, by the wife. In addition, it found that she had assisted her husband's efforts toward increasing the apartments value by caring for the couple's child in order to free up his time. The Second Department reversed an order that determined the wife's share of out-of-state property was separate property because renovations were paid for with funds from a marital account. Imhof v. Imhof , 259 A.D.2d 666 (2d Dept. 1999). The First Department went even further in Spencer v. Spencer , 230 A.D.2d 645 (1st Dept. 1996) when, citing to Price , it awarded one-half of the increase to an admittedly separately maintained investment account and apartment house to the wife, reasoning that the wife's household efforts allowed her husband the time he needed to wisely invest. See also, Lukacs v. Lukacs , 238 A.D.2d 483, 657 N.Y.S.2d 191 (2d Dept. 1997) (ordering hearing to determine value of separate property and ruling that lower court correctly awarded one-third share of increase in separate property to wife who “contributed her efforts during the marriage”); Lagnena v. Lagnena, 215 A.D.2d 445 (2d Dept. 1995) (one-half of increase in wife's real estate awarded to husband due to his efforts in maintaining property); Derderian v. Der derian, 167 A.D.2d 158 (1st Dept. 1990) (upheld award from husband's real estate empire to wife based upon her “services as a homemaker” and “in maintaining and operating the real estate”); Lauria v. Lauria , 187 A.D.2d 888 (3d Dept. 1992) (where husband directly contributed to wife's house, court awarded him 40% of increase in value during marriage).

Conversely, courts have rejected this view where the party seeking to share in the increase in value of separate real property failed to provide evidentiary proof to support the claim. A recent Second Department case, Carniol v. Carniol , 306 AD2d 366 (2d Dept. 2003), demonstrates the high burden of proof required from the non-titled spouse. There, the lower court was reversed in its decision to include the appreciation in value of the marital residence as marital property. The husband had purchased the marital home before the marriage and it was clearly separate property. Since the wife failed to establish that the increase in value was attributable to the efforts of either party, “and since there is no causal connection between her contributions to the marital relationship and the appreciation of the marital home, the amount of such appreciation should be deemed separate property.”

Similar results were reached in other cases where there was a failure of proof. In Saslow v. Saslow, 2002 WL 32092474 (2d Dept. 2003), the Second Department reversed the lower court, which improperly determined that the appreciation in value of a commercial condominium in Manhattan was marital property. The appellate court found that the wife failed to prove any specific increase in value or that any increase was due in part to her contributions or efforts. The Second Department has shown skepticism in many other cases, such as Kraeger v. Kraeger , 271 A.D.2d 657 (2d Dept. 2000), in which the non-titled spouse got no award where market forces and maintenance increased the value, rather than renovations and spousal efforts; and Pulice v. Pulice , 242 A.D.2d 527 (2d Dept. 1997) and Feldman v. Feldman , 194 A.D.2d 207, 217, 605 N.Y.S.2d 777 (2d Dept.1993), in which no award was made to the non-titled spouse because the court could not determine how much the increase was for lack of an offer of baseline value. See also, Emaleh v. Emaleh , 184 A.D.2d 544 (2d Dept. 1992) (husband failed to rebut wife's experts' testimony that increase in value was due solely to market forces); Fitzgibbons v. Fitzgibbons , 161 A.D.2d 619 (2d Dept. 1990) (same).

Conclusion

The lesson to be learned from these appellate cases is that the non-titled spouse must offer proof of her direct and indirect contributions and testimony from a qualified real estate appraiser must be adduced to establish a causal connection between such contributions and the appreciation in the separate real property. This remains a difficult burden where the marital residence itself is involved and the non-titled spouse has made only indirect contributions as a spouse, parent and homemaker to the marital relationship. But with income property, the case law supports broader rights for the non-titled spouse, as long as proper proof of the non-titled spouse's contribution to increased value, either direct or indirect, is offered.