The Marital Residence

Crucial to any division of the marital residence (or other assets) is an understanding of the tax consequences attendant thereto. Unfortunately, relevant tax issues are at times not addressed by the parties or the court, resulting in further litigation over the allocation of tax debt.

Tax Issues

In Loeb v. Loeb, 186 AD2d 174 (2^nd Dept. 1992), the trial court directed that the parties share in the proceeds of the sale of certain real property, without making any allocation of the capital gains tax relating to the sale. On appeal, the Appellate Division modified the judgment of divorce so as to provide that any tax obligation resulting from the sale would be paid in proportion to the profits each party derived from the sale.

In Ruvolo v. Ruvolo, 133 AD2d 364 (2^nd Dept. 1987), the trial court ordered that each party pay one-half the taxes resulting from the sale of the marital home, notwithstanding the fact that the wife realized all the profits from the sale of the home. The judgment was modified by the Appellate Division, which found that equity required that the wife bear all of the tax consequences of sale, because she was realizing all of the profits.

In Teitler v. Teitler, 156 AD2d 314 (1^st Dept. 1989), the parties acquired a brownstone townhouse during the marriage, with title ultimately being placed in a subchapter S corporation of which the wife was the sole shareholder. The home was originally acquired for the sum of $145,000, and was worth $1,000,000 at the time it was to be sold. Each party was entitled to a 50% distribution of the value of the townhouse upon the sale of same. On appeal, the First Department noted that the capital gain tax liability upon sale would be substantial and, in light of the fact that the wife's corporation held title to the property, would fall upon the wife alone for tax purposes. In order to achieve a more equitable result, the court held that any tax liability arising out of a sale to a third party should be satisfied by the parties in the same ratio that their respective shares of the profits bore to the total profits of sale. It was the appellate court's determination that to saddle the wife with all of the capital gains taxes would be inequitable to her, and would afford a financial windfall to the husband.

In negotiation matters concerning a buyout of one party's interest in the equity of the marital residence, a question may arise as to whether capital gain tax consequences should be addressed and figured into the value attributed to the property, under the assumption that the eventual title holder may sell the property at a later date. In a series of cases involving commercial properties and business assets, this state's appellate courts have consistently adhered to the proposition that, absent proof that a sale of the asset is planned, there is no need for the court to consider tax consequences at all. See, e.g., Hamroff v. Hamroff, 35 AD3d 365 (2^nd Dept. 2006); Kudela v. Kudela, 277 AD2d 1015 (4^th Dept. 2000); Waldman v. Waldman, 196 AD2d 650 (2^nd Dept. 1993); Kohl v. Kohl, 6 Misc.3d 1009 (A), (Sup. Ct., New York Cty. 2004). The reasoning of these cases would seem to preclude a court from reducing the amount of any distributive award provided to the party who will not retain an interest in the property, despite the other party's need to satisfy capital gain taxes upon sale at a later date.

Carrying Charges for the Marital Residence

Another area rife with dispute concerns each party's obligation to satisfy carrying charges related to the marital residence.

In Judge v. Judge, 2008 WL 331477 (2^nd Dept. 2008), the wife moved out of the marital residence approximately two years before the action for divorce was commenced. At trial, the husband sought a monetary credit toward the amount he expended in satisfying the home's carrying charges. The Appellate Division modified the trial court's judgment, awarding the husband one-half the sums he incurred in payment of taxes and the mortgage after the commencement of the action for divorce. The court's holding was based on the concept that it is the responsibility of each party to maintain the marital residence during the pendency of the divorce proceedings.

In an earlier decision of the Second Department, also involving a spouse's abandonment of the home, the court ordered reimbursement to the spouse who remained in the residence for half the carrying charges expended subsequent to the other spouse's departure. Freigang v. Freigang, 256 AD2d 539 (2^nd Dept. 1998). This determination was made as part of a post- judgment proceeding for partition, and despite an extended period of exclusive use and occupancy of the premises by the party seeking reimbursement for the expenses incurred. In discussing the parties' respective rights as co-tenants, the court stressed that 'the mere fact that a tenant enjoys exclusive use of a property held in common, without more, does not either preclude reimbursement from a cotenant of expenditures ' or constitute an ouster of a cotenant ' ' Freigang at p. 540.

In Soyer v. Perricone, 222 AD2d 496 (2^nd Dept. 1995), the parties were divorced by a judgment that awarded the wife exclusive use and occupancy of the marital residence pending a future sale. A provision was contained in the judgment providing the wife with reimbursement for 'amortization payments' made by her during her period of exclusive occupancy. The judgment was, however, silent with respect to other charges, such as escrow payments for taxes, water and sewer charges and repairs. Under such circumstances, the Appellate Division limited reimbursement to the wife, at the time of sale, to that which concerned mortgage principal and interest payments alone.

In an interesting twist of facts, Borock v. Fray, 220 AD2d 637 (2^nd Dept. 1995) involved a judgment that incorporated a stipulation providing that the wife would remain in the marital residence until the parties' oldest child reached the age of 18. No provision was made for satisfaction of the carrying charges. Following the end of the wife's period of exclusive occupancy, she continued to reside in the home. In deciding how to allocate expenses related to the home, the court viewed the parties' obligations during two time periods. During the time period following the end of the wife's exclusive occupancy, she was solely responsible for all carrying charges assessed against the premises, in that her continued occupancy had 'effectively ousted' the husband from possession of the home. Additionally, the wife was held responsible for payment of all carrying charges applicable to her period of exclusive occupancy, without further discussion in the court's decision, but based upon an earlier decision in Martin v. Martin, 82 AD2d 431 (2^nd Dept. 1981). (The holding in Borock, appears to conflict with dicta contained in the Freigang decision, supra, decided at a later date).

Once again, proper framing of a stipulation is essential to avoid further litigation concerning the unresolved issues described above, vis ' vis the parties' financial obligations during a period of extended occupancy of the marital residence. In the event that such issues proceed to trial, it is necessary that the court allocate the manner in which carrying charges will be paid to avoid confusion, and based upon each parties abilities to afford such expenses.

Valuation Date

In litigating and negotiating the distribution of the marital residence, the practitioner must be cognizant of various strategic factors, including the utility of maintaining the home and the tax consequences relevant to the sale of the residence. In addition, as has become evident in the current economic downturn, the state of the real estate market both at present and in the future must be taken into account.

For purposes of equitable distribution, the valuation date for marital assets can be any date from the date of commencement of the action to the date of trial. Domestic Relations Law 236 (B)(4)(b); Lipsky v. Lipsky, 276 AD2d 753 (2^nd Dept. 2000). There exists no firm rule concerning the date to be chosen, and it has been noted that ' ' a trial court must have the discretion to select a date appropriate to the case before it in light of the particular circumstances presented.' Wegman v. Wegman, 123 AD2d 220 (2^nd Dept. 1986).

Where the asset in question is passive in nature (i.e., those assets whose post-commencement worth are primarily controlled by market forces or inflation) courts have generally used a time-of-trial valuation, so as to avoid a windfall to one spouse based on fluctuations in the asset's value caused by external factors outside the parties' control. See, e.g. Collins v. Donnelly-Collins, 19 AD3d 356 (2^nd Dept. 2005); Patelunas v. Patelunas, 139 AD2d 883 (3^rd Dept. 1988); Capasso v. Capasso, 129 AD2d 267 (1^st Dept. 1987). By example, in Opperisano v. Opperisano, 35 AD3d 686 (2^nd Dept. 2006), the court determined that a proper disposition of the marital residence would involve either a sale of the property and sharing of the profits, or a buyout by the wife based on the exiting fair market value at the time of trial.

In Brevilus v. Brevilus, 41 AD3d 630 (2^nd Dept. 2007), the parties' trial proceeded on various dates between October 2004 and June 2005. The trial court directed the wife to accept a buyout of her interest in the marital residence, and used a valuation of the property current as of June 2003 (more than one year prior to the commencement of trial). In remitting the matter for a new trial, the Appellate Division held that the appropriate date for valuation of the residence was the date of the commencement of trial.

In Bartek v. Draper, 309 AD 2d 825 (2^nd Dept. 2003), the parties were similarly engaged in a lengthy trial, involving, inter alia, the issue of the appropriate valuation date for their cooperative apartment. Trial testimony was received from an appraiser on March 4, 1999. More than one year later, on June 26, 2000, the trial testimony ended. In remitting the matter to the trial court for a new hearing, the Appellate Division directed an appraisal as of June 26, 2000, while noting that the last date of testimony was the appropriate date for valuation.

Appellate courts have deviated from the date-of-trial guidepost in order to balance the equities, basing that decision on one party's misconduct.

In Fuchs v. Fuchs, 276 AD2d 868 (3^rd Dept. 2000), the court accepted an appraisal of the marital residence that pre-dated the commencement of the divorce action. Title to the residence was granted to the husband. In reaching its determination to use a pre-commencement valuation date for purposes of distribution, the court found that the husband had allowed the residence to fall into disrepair, which had contributed to a significant decrease in its value.

In Maio v. Maio, 151 AD2d 463 (2^nd Dept. 1989), the husband increased the mortgage against the marital residence which, in turn, decreased the property's equity as of trial. The husband was granted title to the residence. In order to offset the husband's diminution of the value of the asset, the court used a date-of-commencement balance on the mortgage to determine the property's equity in making a distributive award to the wife.

In a recent trial court decision, a date-of-commencement value was employed to prevent a spouse from sharing in the increased value of the marital residence in light of his persistent misconduct and obtrusive litigation tactics. Based on findings that the husband refused to support his family, violated orders of the court, failed to engage in disclosure and neglected to pay the mortgage, the trial court determined that it would be inequitable to use the higher date of trial value in making equitable distribution of the marital residence. Such increase in the asset's value occurred notwithstanding the husband's delinquent conduct. See Aseel v. Aseel, Nassau County Supreme Court, Index No. 202947/2002 (Zimmerman, J.).

Conclusion

The party retaining title to the home must possess the ability to maintain the asset based on his or her available cash flow. That party must also be aware of the capital gains taxes attendant to the sale of the home (including the ability to exclude gain), as well as expected increases and/or decreases in the value of the residence based on fluctuations in the real estate market. A party who will not be retaining an interest in the home will likewise need to concern herself with the potential loss of the investment in the property, and any continuation of liability under existing mortgages against the property. All of these issues must be addressed by appropriate legal strategy and the use of financial professionals and appraisers.

Mark L. Plaine is in private practice in Kew Gardens, NY. Mr. Plaine is a member of the Amicus and Pension and Retirement Fund committees of the 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

Crucial to any division of the marital residence (or other assets) is an understanding of the tax consequences attendant thereto. Unfortunately, relevant tax issues are at times not addressed by the parties or the court, resulting in further litigation over the allocation of tax debt.

Tax Issues

In Loeb v. Loeb , 186 AD2d 174 (2 nd Dept. 1992), the trial court directed that the parties share in the proceeds of the sale of certain real property, without making any allocation of the capital gains tax relating to the sale. On appeal, the Appellate Division modified the judgment of divorce so as to provide that any tax obligation resulting from the sale would be paid in proportion to the profits each party derived from the sale.

In Ruvolo v. Ruvolo , 133 AD2d 364 (2 nd Dept. 1987), the trial court ordered that each party pay one-half the taxes resulting from the sale of the marital home, notwithstanding the fact that the wife realized all the profits from the sale of the home. The judgment was modified by the Appellate Division, which found that equity required that the wife bear all of the tax consequences of sale, because she was realizing all of the profits.

In Teitler v. Teitler , 156 AD2d 314 (1 st Dept. 1989), the parties acquired a brownstone townhouse during the marriage, with title ultimately being placed in a subchapter S corporation of which the wife was the sole shareholder. The home was originally acquired for the sum of $145,000, and was worth $1,000,000 at the time it was to be sold. Each party was entitled to a 50% distribution of the value of the townhouse upon the sale of same. On appeal, the First Department noted that the capital gain tax liability upon sale would be substantial and, in light of the fact that the wife's corporation held title to the property, would fall upon the wife alone for tax purposes. In order to achieve a more equitable result, the court held that any tax liability arising out of a sale to a third party should be satisfied by the parties in the same ratio that their respective shares of the profits bore to the total profits of sale. It was the appellate court's determination that to saddle the wife with all of the capital gains taxes would be inequitable to her, and would afford a financial windfall to the husband.

In negotiation matters concerning a buyout of one party's interest in the equity of the marital residence, a question may arise as to whether capital gain tax consequences should be addressed and figured into the value attributed to the property, under the assumption that the eventual title holder may sell the property at a later date. In a series of cases involving commercial properties and business assets, this state's appellate courts have consistently adhered to the proposition that, absent proof that a sale of the asset is planned, there is no need for the court to consider tax consequences at all. See, e.g., Hamroff v. Hamroff , 35 AD3d 365 (2 nd Dept. 2006); Kudela v. Kudela , 277 AD2d 1015 (4 th Dept. 2000); Waldman v. Waldman , 196 AD2d 650 (2 nd Dept. 1993); Kohl v. Kohl , 6 Misc.3d 1009 (A), (Sup. Ct., New York Cty. 2004). The reasoning of these cases would seem to preclude a court from reducing the amount of any distributive award provided to the party who will not retain an interest in the property, despite the other party's need to satisfy capital gain taxes upon sale at a later date.

Carrying Charges for the Marital Residence

Another area rife with dispute concerns each party's obligation to satisfy carrying charges related to the marital residence.

In Judge v. Judge, 2008 WL 331477 (2^nd Dept. 2008), the wife moved out of the marital residence approximately two years before the action for divorce was commenced. At trial, the husband sought a monetary credit toward the amount he expended in satisfying the home's carrying charges. The Appellate Division modified the trial court's judgment, awarding the husband one-half the sums he incurred in payment of taxes and the mortgage after the commencement of the action for divorce. The court's holding was based on the concept that it is the responsibility of each party to maintain the marital residence during the pendency of the divorce proceedings.

In an earlier decision of the Second Department, also involving a spouse's abandonment of the home, the court ordered reimbursement to the spouse who remained in the residence for half the carrying charges expended subsequent to the other spouse's departure. Freigang v. Freigang , 256 AD2d 539 (2 nd Dept. 1998). This determination was made as part of a post- judgment proceeding for partition, and despite an extended period of exclusive use and occupancy of the premises by the party seeking reimbursement for the expenses incurred. In discussing the parties' respective rights as co-tenants, the court stressed that 'the mere fact that a tenant enjoys exclusive use of a property held in common, without more, does not either preclude reimbursement from a cotenant of expenditures ' or constitute an ouster of a cotenant ' ' Freigang at p. 540.

In Soyer v. Perricone , 222 AD2d 496 (2 nd Dept. 1995), the parties were divorced by a judgment that awarded the wife exclusive use and occupancy of the marital residence pending a future sale. A provision was contained in the judgment providing the wife with reimbursement for 'amortization payments' made by her during her period of exclusive occupancy. The judgment was, however, silent with respect to other charges, such as escrow payments for taxes, water and sewer charges and repairs. Under such circumstances, the Appellate Division limited reimbursement to the wife, at the time of sale, to that which concerned mortgage principal and interest payments alone.

In an interesting twist of facts, Borock v. Fray , 220 AD2d 637 (2 nd Dept. 1995) involved a judgment that incorporated a stipulation providing that the wife would remain in the marital residence until the parties' oldest child reached the age of 18. No provision was made for satisfaction of the carrying charges. Following the end of the wife's period of exclusive occupancy, she continued to reside in the home. In deciding how to allocate expenses related to the home, the court viewed the parties' obligations during two time periods. During the time period following the end of the wife's exclusive occupancy, she was solely responsible for all carrying charges assessed against the premises, in that her continued occupancy had 'effectively ousted' the husband from possession of the home. Additionally, the wife was held responsible for payment of all carrying charges applicable to her period of exclusive occupancy, without further discussion in the court's decision, but based upon an earlier decision in Martin v. Martin , 82 AD2d 431 (2 nd Dept. 1981). (The holding in Borock , appears to conflict with dicta contained in the Freigang decision, supra , decided at a later date).

Once again, proper framing of a stipulation is essential to avoid further litigation concerning the unresolved issues described above, vis ' vis the parties' financial obligations during a period of extended occupancy of the marital residence. In the event that such issues proceed to trial, it is necessary that the court allocate the manner in which carrying charges will be paid to avoid confusion, and based upon each parties abilities to afford such expenses.

Valuation Date

In litigating and negotiating the distribution of the marital residence, the practitioner must be cognizant of various strategic factors, including the utility of maintaining the home and the tax consequences relevant to the sale of the residence. In addition, as has become evident in the current economic downturn, the state of the real estate market both at present and in the future must be taken into account.

For purposes of equitable distribution, the valuation date for marital assets can be any date from the date of commencement of the action to the date of trial. Domestic Relations Law 236 (B)(4)(b); Lipsky v. Lipsky , 276 AD2d 753 (2 nd Dept. 2000). There exists no firm rule concerning the date to be chosen, and it has been noted that ' ' a trial court must have the discretion to select a date appropriate to the case before it in light of the particular circumstances presented.' Wegman v. Wegman , 123 AD2d 220 (2 nd Dept. 1986).

Where the asset in question is passive in nature (i.e., those assets whose post-commencement worth are primarily controlled by market forces or inflation) courts have generally used a time-of-trial valuation, so as to avoid a windfall to one spouse based on fluctuations in the asset's value caused by external factors outside the parties' control. See, e.g. Collins v. Donnelly-Collins , 19 AD3d 356 (2 nd Dept. 2005); Patelunas v. Patelunas , 139 AD2d 883 (3 rd Dept. 1988); Capasso v. Capasso , 129 AD2d 267 (1 st Dept. 1987). By example, in Opperisano v. Opperisano , 35 AD3d 686 (2 nd Dept. 2006), the court determined that a proper disposition of the marital residence would involve either a sale of the property and sharing of the profits, or a buyout by the wife based on the exiting fair market value at the time of trial.

In Brevilus v. Brevilus , 41 AD3d 630 (2 nd Dept. 2007), the parties' trial proceeded on various dates between October 2004 and June 2005. The trial court directed the wife to accept a buyout of her interest in the marital residence, and used a valuation of the property current as of June 2003 (more than one year prior to the commencement of trial). In remitting the matter for a new trial, the Appellate Division held that the appropriate date for valuation of the residence was the date of the commencement of trial.

In Bartek v. Draper , 309 AD 2d 825 (2 nd Dept. 2003), the parties were similarly engaged in a lengthy trial, involving, inter alia , the issue of the appropriate valuation date for their cooperative apartment. Trial testimony was received from an appraiser on March 4, 1999. More than one year later, on June 26, 2000, the trial testimony ended. In remitting the matter to the trial court for a new hearing, the Appellate Division directed an appraisal as of June 26, 2000, while noting that the last date of testimony was the appropriate date for valuation.

Appellate courts have deviated from the date-of-trial guidepost in order to balance the equities, basing that decision on one party's misconduct.

In Fuchs v. Fuchs , 276 AD2d 868 (3 rd Dept. 2000), the court accepted an appraisal of the marital residence that pre-dated the commencement of the divorce action. Title to the residence was granted to the husband. In reaching its determination to use a pre-commencement valuation date for purposes of distribution, the court found that the husband had allowed the residence to fall into disrepair, which had contributed to a significant decrease in its value.

In Maio v. Maio , 151 AD2d 463 (2 nd Dept. 1989), the husband increased the mortgage against the marital residence which, in turn, decreased the property's equity as of trial. The husband was granted title to the residence. In order to offset the husband's diminution of the value of the asset, the court used a date-of-commencement balance on the mortgage to determine the property's equity in making a distributive award to the wife.

In a recent trial court decision, a date-of-commencement value was employed to prevent a spouse from sharing in the increased value of the marital residence in light of his persistent misconduct and obtrusive litigation tactics. Based on findings that the husband refused to support his family, violated orders of the court, failed to engage in disclosure and neglected to pay the mortgage, the trial court determined that it would be inequitable to use the higher date of trial value in making equitable distribution of the marital residence. Such increase in the asset's value occurred notwithstanding the husband's delinquent conduct. See Aseel v. Aseel, Nassau County Supreme Court, Index No. 202947/2002 (Zimmerman, J.).

Conclusion

The party retaining title to the home must possess the ability to maintain the asset based on his or her available cash flow. That party must also be aware of the capital gains taxes attendant to the sale of the home (including the ability to exclude gain), as well as expected increases and/or decreases in the value of the residence based on fluctuations in the real estate market. A party who will not be retaining an interest in the home will likewise need to concern herself with the potential loss of the investment in the property, and any continuation of liability under existing mortgages against the property. All of these issues must be addressed by appropriate legal strategy and the use of financial professionals and appraisers.

Mark L. Plaine is in private practice in Kew Gardens, NY. Mr. Plaine is a member of the Amicus and Pension and Retirement Fund committees of the 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