The Marital Residence

Butler v. Butler

In Butler v. Butler, 171 AD2d 89 (2^nd Dept. 1991), the Appellate Division framed the issue at hand, concerning credits for separate property contributions toward the marital residence: 'How should a court distribute an asset which was acquired and which has significantly increased in value during a marriage, where the asset in question was originally acquired in exchange for unequal amounts of each spouse's separate property?'

The facts of Butler appear to be relatively straightforward. The home was purchased during the marriage for $260,000. The total down payment was $105,000, consisting of a $86,442 separate property contribution from the wife; a $10,378 separate property contribution from the husband; and a contribution of $8,180 from marital funds. The residence was valued at $285,000 for purposes of distribution.

Regarding their respective credits on separate property contributions, the litigants proffered opposing arguments. The husband advocated an approach in which the court would first reimburse each party with a dollar-for-dollar credit for their separate property contributions, and would then divide the remaining equity on a 50%-50% basis. The wife asked for a percentage approach, wherein the court would divide the total equity proportional to each party's separate property contributions and marital property contributions to the down payment ' i.e., since the wife's separate property and marital property contributions to the down payment equated to 86.2% of the entire down payment, she sought a distribution to herself of 86.2% of the proceeds of the sale of the home.

While noting that each party's analysis was legally flawed, the Appellate Division, citing Domestic Relations Law '236(B)(1)(b)(3), stressed that the court must be cognizant of the rule that appreciation in value of separate property remains separate property unless the appreciation is attributable to the direct or indirect efforts of the other spouse. After analyzing the particular facts in Butler, including the fact that certain improvements to the residence were attributable to the husband, the court concluded that, upon the sale of the home, each party should initially recoup the exact dollar amount of their original contributions. The court also determined that the remaining proceeds of sale should be divided such that the wife would receive 75% of same, and the husband would receive the remaining 25%. In so doing, the court seemed to have implicitly attributed the appreciated value to both active and passive forces.

Woodson v. Woodson

In Woodson v. Woodson, 178 AD2d 642 (2^nd Dept 1991), a decision handed down by the same appellate court shortly thereafter, the parties were awarded percentage interests in the appreciated real property, which correlated to their separate property contributions toward the asset. Since the wife had contributed 31% of the purchase value of the property, she was therefore entitled to a like percentage of the property's value at trial. Unlike its decision in Butler, the court in Woodson made no finding that the increase in the property's value resulted from either party's active efforts.

Heine v. Heine

In Heine v. Heine, 176 AD2d 77 (1^st Dept 1992), the Appellate Division, First Department, reversed a decision of the trial court concerning distribution of the parties' townhouse. After the husband established that 23% of the purchase price emanated from his separate property funds, the trial court awarded him an equivalent percentage of the home's current value. Upon review of the underlying facts, including each parties' contributions to the subject property, the Appellate Division determined that the appreciation in the property's value was not attributable to the down payment, but instead resulted from a combination of renovations supervised by the wife and paid for with marital funds, mortgage payments made with marital funds, and market forces. Based upon these findings, the Appellate Division credited the husband with his separate property contribution, and then divided the remaining equity in the home equally between the parties.

Bartha v. Bartha

As a general rule, where the appreciation in value of the residence results from active efforts during marriage, each spouse will receive a return of their respective separate property contributions followed by an equitable division of the appreciated value of the property. In Bartha v. Bartha, 15 AD3d 111 (1^st Dept. 2005), each party had made separate property contributions to a townhouse which had greatly increased in value during the marriage (from $395,000 to $5 million). The Appellate Division remanded the matter to the lower court for a determination of each party's claims against the value of the appreciated home. In so doing, the court noted that the appreciation in value of the home ' ' was unrelated to the down payments, but very much related to the complete gutting and renovation which was largely overseen by plaintiff and paid for by the parties' marital funds.' Bartha p.117.

Richards v. Richards

In Richards v. Richards, 207 AD2d 628 (3^rd Dept. 1994), the Third Department affirmed a determination of the trial court that distributed the marital home. The husband had contributed the sum of $41,129 of his separate property toward the purchase of the home, and sought and unequal division of the asset based upon the theory that his economic contributions toward the property 'far outweighed' those of the wife. After finding that the property had appreciated in value because of the remodeling of the home rather than as a result of market forces, the Appellate Division ruled that an equal distribution of the appreciation was appropriate.

Carr v. Carr

In Carr v. Carr, 291 AD2d 672 (3^rd Dept. 2002), the defendant-husband contributed $195,000 of his separate property monies towards the marital home. The home was purchased shortly after the parties' marriage for $410,000, and was valued at $650,000 for purposes of equitable distribution. Improvements to the property, paid for with marital funds, totaled 'at least $350,000.' In an interesting analysis of the parties' entitlements to separate property and marital property upon the contemplated sale of the residence, the Appellate Division opined at follows: 'As can be seen, the monies expended on the marital residence, $760,000, exceeds the value of the property by over $100,000, thus constraining the conclusion that there was no appreciation in its value. Under the circumstances, no claim can be made that any part of the value of the residence should be considered marital property by virtue of plaintiff's active efforts ' That is not to say, however, that plaintiff is without a remedy. To the contrary, she is entitled to recoup her equitable share of the marital funds used to reduce the indebtedness and pay for improvements to the property.'

In reaching its decision in Carr, the Appellate Division explained that the trial court's determination (which treated the marital residence as marital property but allowed the husband to recoup his separate property contribution) was theoretically incorrect, but ultimately resulted in an appropriate result. Carr at p. 419.

Boyce v. Boyce

In Boyce v. Boyce, 238 AD2d 458 (2^nd Dept. 1997), the court was faced with the construction of a separation agreement as it pertained to the parties' rights to separate property credits upon the sale of the marital residence. By agreement, both parties acknowledged that the wife was entitled to a separate property credit of $31,500. The operative provision of the separation agreement provided that, upon the sale of the marital residence, 'the wife shall first be paid the amount of thirty one thousand five hundred dollars ($31,500)' and then the proceeds from the sale would be divided equally. The property was ultimately sold. A dispute arose as to the division of proceeds of sale. The husband contended that the first $31,500 would go to the wife and that the remaining proceeds of sale should be divided equally. It was the wife's position that the proceeds of sale should be first divided equally, and then that the husband should transfer to her (out of his one half share of the proceeds) the sum of $31,500. Under the wife's theory, the husband's approach would deprive her of one half of her separate property credit (i.e., the sum of $15,750). The proceeds of sale totaled $330,516. After analyzing the separation agreement and the equities of the matter, the Appellate Division adopted the husband's approach as the correct methodology. In so doing, the court reversed the judgment of the lower court, which had used the wife's approach. The Appellate Division noted that, by use of the husband's method, the wife correctly received $31,500 more than did the husband. By using the husband's approach, the wife received the total sum of $181,008 and the husband got $149,508.

Conclusion

Several lessons can be taken from these cases. In drafting marital agreements with an eye toward maximizing separate property credits in the distribution of the marital residence, it would behoove each party to clearly set forth their respective entitlements upon a sale or buyout of the asset. Absent such an agreement, it is essential that each party be able to prove their separate property contributions, and establish the extent to which the appreciation in value of their separate property resulted from either market forces, active efforts, or the infusion of marital funds.

Mark I. Plaine is in private practice in Kew Gardens, NY. Mr. Plaine is a member of the Amicus and Pension and Retirement Fund committees of New York State Bar Association Family Law Section, and a member of the Interdisciplinary Committees for Accountants and Appraisers and Mental Health Professionals with the American Academy of Matrimonial Lawyers.

In matrimonial litigation the marital residence often constitutes the parties' most valuable asset. Equitable distribution of this asset can involve issues that may or may not have been anticipated at the outset of the litigation. Within the process of accomplishing an equitable division of the home are considerations of separate property credits, capital gains taxes, expenses relating to the residence and timing of valuation of the home. In this month's issue, we discuss separate property credits. The other considerations when equitably distributing the home will be covered in next month's issue.

Separate Property Credits

Historically, when purchasing their first home, married couples use pre-marital savings and/or post-marital gifts and inheritances to pay for the costs of purchase and improvement. In the course of the divorce process, a question may arise as to the extent to which such separate property contributions can be recouped, both in their original and appreciated forms. This inquiry often involves not only a factual analysis of the underlying causes of changes in value to the marital residence, but also a determination as to the interplay between market forces and the parties' conduct vis-'-vis the property.

Butler v. Butler

In Butler v. Butler , 171 AD2d 89 (2 nd Dept. 1991), the Appellate Division framed the issue at hand, concerning credits for separate property contributions toward the marital residence: 'How should a court distribute an asset which was acquired and which has significantly increased in value during a marriage, where the asset in question was originally acquired in exchange for unequal amounts of each spouse's separate property?'

The facts of Butler appear to be relatively straightforward. The home was purchased during the marriage for $260,000. The total down payment was $105,000, consisting of a $86,442 separate property contribution from the wife; a $10,378 separate property contribution from the husband; and a contribution of $8,180 from marital funds. The residence was valued at $285,000 for purposes of distribution.

Regarding their respective credits on separate property contributions, the litigants proffered opposing arguments. The husband advocated an approach in which the court would first reimburse each party with a dollar-for-dollar credit for their separate property contributions, and would then divide the remaining equity on a 50%-50% basis. The wife asked for a percentage approach, wherein the court would divide the total equity proportional to each party's separate property contributions and marital property contributions to the down payment ' i.e., since the wife's separate property and marital property contributions to the down payment equated to 86.2% of the entire down payment, she sought a distribution to herself of 86.2% of the proceeds of the sale of the home.

While noting that each party's analysis was legally flawed, the Appellate Division, citing Domestic Relations Law '236(B)(1)(b)(3), stressed that the court must be cognizant of the rule that appreciation in value of separate property remains separate property unless the appreciation is attributable to the direct or indirect efforts of the other spouse. After analyzing the particular facts in Butler, including the fact that certain improvements to the residence were attributable to the husband, the court concluded that, upon the sale of the home, each party should initially recoup the exact dollar amount of their original contributions. The court also determined that the remaining proceeds of sale should be divided such that the wife would receive 75% of same, and the husband would receive the remaining 25%. In so doing, the court seemed to have implicitly attributed the appreciated value to both active and passive forces.

Woodson v. Woodson

In Woodson v. Woodson , 178 AD2d 642 (2 nd Dept 1991), a decision handed down by the same appellate court shortly thereafter, the parties were awarded percentage interests in the appreciated real property, which correlated to their separate property contributions toward the asset. Since the wife had contributed 31% of the purchase value of the property, she was therefore entitled to a like percentage of the property's value at trial. Unlike its decision in Butler, the court in Woodson made no finding that the increase in the property's value resulted from either party's active efforts.

Heine v. Heine

In Heine v. Heine , 176 AD2d 77 (1 st Dept 1992), the Appellate Division, First Department, reversed a decision of the trial court concerning distribution of the parties' townhouse. After the husband established that 23% of the purchase price emanated from his separate property funds, the trial court awarded him an equivalent percentage of the home's current value. Upon review of the underlying facts, including each parties' contributions to the subject property, the Appellate Division determined that the appreciation in the property's value was not attributable to the down payment, but instead resulted from a combination of renovations supervised by the wife and paid for with marital funds, mortgage payments made with marital funds, and market forces. Based upon these findings, the Appellate Division credited the husband with his separate property contribution, and then divided the remaining equity in the home equally between the parties.

Bartha v. Bartha

As a general rule, where the appreciation in value of the residence results from active efforts during marriage, each spouse will receive a return of their respective separate property contributions followed by an equitable division of the appreciated value of the property. In Bartha v. Bartha , 15 AD3d 111 (1 st Dept. 2005), each party had made separate property contributions to a townhouse which had greatly increased in value during the marriage (from $395,000 to $5 million). The Appellate Division remanded the matter to the lower court for a determination of each party's claims against the value of the appreciated home. In so doing, the court noted that the appreciation in value of the home ' ' was unrelated to the down payments, but very much related to the complete gutting and renovation which was largely overseen by plaintiff and paid for by the parties' marital funds.' Bartha p.117.

Richards v. Richards

In Richards v. Richards , 207 AD2d 628 (3 rd Dept. 1994), the Third Department affirmed a determination of the trial court that distributed the marital home. The husband had contributed the sum of $41,129 of his separate property toward the purchase of the home, and sought and unequal division of the asset based upon the theory that his economic contributions toward the property 'far outweighed' those of the wife. After finding that the property had appreciated in value because of the remodeling of the home rather than as a result of market forces, the Appellate Division ruled that an equal distribution of the appreciation was appropriate.

Carr v. Carr

In Carr v. Carr , 291 AD2d 672 (3 rd Dept. 2002), the defendant-husband contributed $195,000 of his separate property monies towards the marital home. The home was purchased shortly after the parties' marriage for $410,000, and was valued at $650,000 for purposes of equitable distribution. Improvements to the property, paid for with marital funds, totaled 'at least $350,000.' In an interesting analysis of the parties' entitlements to separate property and marital property upon the contemplated sale of the residence, the Appellate Division opined at follows: 'As can be seen, the monies expended on the marital residence, $760,000, exceeds the value of the property by over $100,000, thus constraining the conclusion that there was no appreciation in its value. Under the circumstances, no claim can be made that any part of the value of the residence should be considered marital property by virtue of plaintiff's active efforts ' That is not to say, however, that plaintiff is without a remedy. To the contrary, she is entitled to recoup her equitable share of the marital funds used to reduce the indebtedness and pay for improvements to the property.'

In reaching its decision in Carr, the Appellate Division explained that the trial court's determination (which treated the marital residence as marital property but allowed the husband to recoup his separate property contribution) was theoretically incorrect, but ultimately resulted in an appropriate result. Carr at p. 419.

Boyce v. Boyce

In Boyce v. Boyce , 238 AD2d 458 (2 nd Dept. 1997), the court was faced with the construction of a separation agreement as it pertained to the parties' rights to separate property credits upon the sale of the marital residence. By agreement, both parties acknowledged that the wife was entitled to a separate property credit of $31,500. The operative provision of the separation agreement provided that, upon the sale of the marital residence, 'the wife shall first be paid the amount of thirty one thousand five hundred dollars ($31,500)' and then the proceeds from the sale would be divided equally. The property was ultimately sold. A dispute arose as to the division of proceeds of sale. The husband contended that the first $31,500 would go to the wife and that the remaining proceeds of sale should be divided equally. It was the wife's position that the proceeds of sale should be first divided equally, and then that the husband should transfer to her (out of his one half share of the proceeds) the sum of $31,500. Under the wife's theory, the husband's approach would deprive her of one half of her separate property credit (i.e., the sum of $15,750). The proceeds of sale totaled $330,516. After analyzing the separation agreement and the equities of the matter, the Appellate Division adopted the husband's approach as the correct methodology. In so doing, the court reversed the judgment of the lower court, which had used the wife's approach. The Appellate Division noted that, by use of the husband's method, the wife correctly received $31,500 more than did the husband. By using the husband's approach, the wife received the total sum of $181,008 and the husband got $149,508.

Conclusion

Several lessons can be taken from these cases. In drafting marital agreements with an eye toward maximizing separate property credits in the distribution of the marital residence, it would behoove each party to clearly set forth their respective entitlements upon a sale or buyout of the asset. Absent such an agreement, it is essential that each party be able to prove their separate property contributions, and establish the extent to which the appreciation in value of their separate property resulted from either market forces, active efforts, or the infusion of marital funds.

Mark I. Plaine is in private practice in Kew Gardens, NY. Mr. Plaine is a member of the Amicus and Pension and Retirement Fund committees of New York State Bar Association Family Law Section, and a member of the Interdisciplinary Committees for Accountants and Appraisers and Mental Health Professionals with the American Academy of Matrimonial Lawyers.