By: Kris Leonhardt, Esq.
When community money is used to improve or invest in the separate real
property of one spouse, the community will have a constructive “lien”
against that separate property in the divorce. What this means is that
the community will likely be entitled to a reimbursement for monies invested
in the separate property as well as a portion of the increase in value.
By way of example, if a spouse owns a home prior to marriage, but after
marriage uses her earnings to pay the monthly mortgage payments, the community
will be entitled to a constructive lien on the property. Let’s say
that Wife purchases a house for $300,000.00 prior to marriage. She puts
10% down ($30,000.00) from her separate money and begins making mortgage
payments. Wife then marries Husband, and they use a joint bank account
or Wife’s post-marriage income (now community property) to pay the
mortgage. At the time of divorce, the mortgage has now been paid down
by $50,000.00 during the marriage alone. This does not include the initial
down payment or the reduction in mortgage prior to the marriage. Additionally,
the parties used $10,000.00 of community money to improve the kitchen.
The total community principal investment is $60,000.00 (we don’t
count interest paid on the mortgage in this calculation). The property
is now worth $450,000.00 (an appreciation of $150,000.00). The Arizona
Court of Appeals established a formula to determine the community lien in
Drahos v. Rens, 149 Ariz. 248, 717 P.2d 927 (App. 1985). Below is the calculation for
C + [C/B x A]
A = appreciation since purchase
B = original purchase price
C = total community contribution
60,000 + [60,000/300,000 x 150,000] = 90,000
So the community lien on the property is $90,000.00, of which each spouse
is entitled to one-half.
The same is true when the separate property is purchased during the marriage,
but the other spouse signs a Disclaimer Deed. If the property is purchased
with separate funds, but community money is used to pay down the mortgage
each month, the community will have a lien similar to that in the above example.
There are also rules for recouping community funds spent on separate property
even when that property is “underwater,” or has lost value
over the course of the marriage. It is important for each spouse to understand
their rights for community reimbursement and their rights in protecting
their separate property in a divorce.
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