Division of Property comprises three main subjects in divorce: Division of Personal Property, Division of Real Property and Alimony. In this Blog, we discuss the division of real property. Real property includes all real estate, such as your home, beach house, condominium, and any interest in real estate. As in the case of personal property, Georgia law provides that upon divorce marital property and debt are to be equitably divided. Couples interested in an uncontested divorce will want to absorb this rather complicated material if they own a home. There are two keywords in divorce property law: “equitable” and “marital”.
What does “equitable” mean?
In Payson v. Payson, 552 S.E.2d 839, 274 Ga. 231 (Ga., 2001), the Georgia Supreme Court stated that the purpose behind the doctrine of equitable division of marital property is “to assure that property accumulated during the marriage be fairly distributed between the parties.” Campbell v. Campbell, 255 Ga. 461(1986), Wright v. Wright, 277 Ga. 133, 134 (2) (2003). In other words, “equitable” means “fair”. There is no set formula for determining what is fair, but among other things, a court or jury in Georgia will take into account the following:
- the needs of each of the parties;
- the age and health of each party;
- the occupation and income of each party;
- the duration of the marriage;
- the contribution of service of each to the family unit;
- the separate estate (assets) of each party;
- the indebtedness of each party;
- the present income, future earning capacity, and financial resources of each party;
- the causes which led to the separation and the conduct of the parties towards each other prior to the separation;
- the contribution of each party to the acquisition and maintenance of the property (which includes non-monetary contributions of a spouse or a homemaker); and
- the purpose and intent of the parties regarding the ownership of the property.
What is “marital” and “separate” property?
Marital property is property acquired by the spouses during the marriage. Marital property is subject to equitable division, while the separate (non-marital) property is not.McArthur v.McArthur, 256 Ga. 762, 763 (1987).As the Court has stated, only the real and personal property and assets acquired as a direct result of the efforts and investments of the partners in a marriage are marital assets subject to equitable division. Wright v. Wright, 277 Ga. 133, 133 (1) (2003). Thus, “[P]roperty acquired during the marriage by either party by gift, inheritance, bequest or devise remains the separate property of the party that acquired it, and is not subject to equitable division.” McArthur, 256 Ga. at 763.
Separate property brought to the marriage by one of the marriage partners is a non-marital asset and is not subject to the equitable division since it was in no sense generated by the marriage. Payson v. Payson, 274 Ga. 231 (2001), Campbell v. Campbell, 255 Ga 461 (1986). Whether a particular item of the property actually is a marital or non-marital asset may be a question of fact for the judge or jury. Franklin v. Franklin, 267 Ga. 82(2) (1996); Janelle v. Janelle, 265 Ga. 116(1) (1995); Bass v. Bass, 264 Ga. 506 (1995).
Transforming separate property into marital property
Reclassification of separate property into marital property can complicate property division. Any property acquired prior to marriage is considered separate property; the same goes for any gifts and inheritances one spouse receives individually during the marriage. Those exceptions aside, anything acquired during the course of the marriage is considered marital property. Property can change character, however, when one spouse uses his or her separate property to contribute to the marital unit or estate. There are three main ways property can be reclassified.
- Gifts – If one spouse gifts personal property to others or to the marital estate (such as using inheritance to renovate the kitchen), then the property will be reclassified as marital property. As the high Georgia Court has stated, “if the property acquired during the marriage is acquired by one spouse as the result of an interspousal gift of marital property, the property retains its status as marital property.” Coe v. Coe, 285 Ga. 863, 864 (2009). Therefore, a spouse can make a gift of non-marital property to the marital estate, and thus transform the separate property into marital property subject to equitable division. Coe v. Coe, 285 Ga. 863, 864 (2009); Lerch v. Lerch, 278 Ga. 885 (2005). In Coe, the marital home was allegedly purchased by the husband with his separate property funds after the parties were married. Because the husband put the title to the home jointly in the parties’ names, the husband’s gift of his non-marital funds to purchase the home transformed his separate property into marital property subject to equitable division.
- Agreement – If the spouses make an agreement to transfer ownership of separate funds into marital property, the property will be categorized as marital. This occurs when the couple enters into a postnuptial agreement stipulating a gift or transfer of separate property to the marital estate, or when one spouse titles a car or home owned prior to marriage into both spouses’ names.
- Commingling – When assets become so integrated that they no longer can be identified as separate, the property will be considered marital for the purposes of property division. This can happen when spouses join bank accounts upon marriage or when one spouse receives a personal gift and deposits it into the couple’s joint account. Horsley v. Horsley, 268 Ga. 460 (1997). “[W]hether a particular kind of property can ever be classified as marital property is a question of law for a judge to decide.” Bass v. Bass, 264 Ga. 506 (1995). “However, whether a particular item of the property actually constitutes a marital or non-marital asset may be a question of fact for the trier of fact to determine from the evidence.” Bass, 264 Ga. 506 (1994). See also, Franklin v. Franklin, 267 Ga. 82 (1996); Janelle v. Janell, 265 Ga. 116 (1995); and Mathis v. Mathis, 281 Ga. 865 (2007).
Marital and separate property – Dividing the marital home
It is especially important to distinguish between marital property and separate property when dividing a marital home that is in part marital and in part separate property. You will recall that marital property is subject to equitable division, while separate property is not. Stokes v. Stokes, 246 Ga. 765 (1980).
Blended assets.But what if one spouse either acquired the marital home prior to the marriage or used a significant portion of separate property to acquire the home or make the initial down payment?What if the spouses improved the home or reduced the balance of the mortgage using martial funds? In these cases, the value of the home is partly marital and partly separate, with a significant effect on what each partner is entitled to. In the case of Thomas v. Thomas, 259 Ga. 73 (1989), the Georgia Supreme Court adopted what is known as the “source of funds” rule already implemented in other states. This analysis or formula is sometimes referred to as the Thomas analysis. The purpose of this analysis is to determine the percentage of an asset or debt (notably, the marital home and other real estates) that is marital property and the percentage that is the non-marital property of one spouse. An uncontested divorce attorney can help you untangle some of the complications. Below is a simplified source of funds analysis for determining each party’s respective financial interest in a marital residence.
Appreciation. Of particular interest in the case of dividing the marital home is whether appreciation in value is marital or non-marital. In Payson v. Payson, 274 Ga. 231 (2001), the Georgia Supreme Court reiterated that appreciation in value of a non-marital asset during the marriage is a marital asset subject to equitable division if the appreciation is the result of the efforts of either spouse or both spouses, but to the extent the appreciation is only the result of market forces, it is a non-marital asset and therefore not subject to equitable division.
The ThomasSource of funds rule
- Calculate the separate funds the husband contributed to the home.
- Calculate the separate funds the wife contributed to the home.
- Calculate the marital funds contributed by both parties.
- Calculate the marital funds used to reduce the principle balance on the mortgage.
- Calculate the fair market value of the home.
- Calculate the total funds contributed to the home (1+2 3).
- Calculate the husband’s percentage of the home’s appreciation (1 divided by 6).
- Calculate the wife’s percentage of the home’s appreciation (2 divided by 6).
- Calculate the marital portion of the home’s appreciation (3 4 divided by 6).
Numbers 7, 8 and 9 should equal the home’s total appreciated value. Once you establish which portion of the home is separate property and which portion of the home is marital property, the next step is to decide how the home will be divided. For this, you must decide what is a fair division of the property. (See the “What does equitable mean
The section above.)
Tracing – Financial / Forensic Accounting
Alternatively, the couple could distinguish between marital property and separate property in a divorce case by a process known as “tracing”. Tracing means going through old financial documents (such as receipts, deposits, bills of sale, etc.), usually with a financial expert such as a legal accountant, in order to prove that the property was at least originally separate property. Tracing can be very complicated, and some judges do not give much importance to the original state of the property.
Applying the Source of Funds Rule to a real case
(using the facts in Hubby v. Hubby, 274 Ga. 525 (2001)):
Purchase Price of Home:$145,500
$80,500 from Husband’s separate funds, or 94.6% of net equity in home plus a $65,000 loan.
The principal amount of the original loan had been reduced by $1,983 (principal loan balance $63,017 at the time of refinance)
Amount of New Loan: $68,500
Division at the time of Divorce:
Fair market value of home: $183,000 (Increase in value of $37,500)
Loan Balance: $65,915 (principal amount of refinance loan had been
reduced was $2,585)
Net equity at time of divorce was $117,085
Source of Funds Analysis
- Calculate net equity based on purchase price: $80,500 + 1,983 + 2,585 for a total net equity of $85,068
- Calculate what percentage of total net equity is separate and marital:
- Husband’s separate property is 94.6% of the net equity ($80,500 divided by $85,068); his marital portion is 5.4% ($1,983 + $2,585 divided by $85,068)
- Calculate the current value of separate and marital sat the time of divorce:
- Husband’s portion of the separate net equity is $110,762 (net equity at time of divorce $117,085 multiplied by 94.6%); His marital portion is $6,322 ($117,085 multiplied by 5.4%).
Therefore, upon divorce, Husband receives $110,762 from his separate property and $6,322 subject to equitable division.
Selling the marital home and other real estate
There are basically four options available to divide the marital home upon divorce: (1) sell the home and divide the net proceeds fairly; (2) one spouse stays in the home, refinances any mortgage in that spouse’s name alone and buys out the other spouse; (3) one spouse, usually the mother, stays in the home with the children until they are adults and then the home is sold and the net proceeds divided fairly; and (4) the home is transferred to one spouse as alimony or division of property.
The first option is to sell the marital home and divide the net proceeds. This option is most often chosen by spouses neither one of whom wants the home or cannot afford the house individually. A couple who chooses to take this option may decide how and when the sale will take place and may agree on their target sale price. Once the home is sold, the profit may either be divided between the spouses or given entirely to one spouse as a form of property settlement or spousal support. The net proceeds to be divided are usually the sale price minus the mortgage and the expenses associated with the sale, such as commissions, attorney’s fees and agreed upon repairs for the sale of the home.
The second option is for one spouse to keep the marital home and buy out the other spouse’s share. If both spouses are listed as borrowers on the mortgage documents, the leaving spouse is still liable for the mortgage in the eyes of the lending institution. In this case, the staying spouse will have to assume or refinance all debt associated with the home into his or her name alone. This way, only the spouse in possession of the home will be legally liable for the lending institution and the other spouse can execute a Quit-Claim Deed transferring all of his or her interest to the staying spouse.
The third option is for one spouse to have exclusive use of the marital home for a specified period of time, such as the length of time the minor children will grow up in the marital home. Spouses can agree that the party living in the house will pay the mortgage, property taxes, utilities, and routine repairs. On the other hand, depending on the parents’ finances, the parents may agree to share these expenses, or the leaving spouse may take responsibility for these costs as a form of child support or alimony. Again, your settlement agreement can be drafted to suit the particular needs of your family. The advice of an uncontested divorce attorney can be invaluable and you are urged to contact The Hughes Law Office at 770-933-0780 for a free consultation.
The fourth option is for one spouse to be awarded the marital home as part of division of property or alimony. Thus, if the couple owns more than one property, they can agree to each keep one or more of the properties as an equitable division of property, or one spouse can be awarded a property as alimony. We will discuss Alimony at greater length in another Blog.
Historical Note: At common law, marriage merged the property rights of the parties and placed control of all property in the husband. 41 Am.Jur. 53, Husband and Wife, § 44. At least as early as 1866 (Ga.L.1866, pp. 146, 147; see Code of 1933 § 53-502), the common law rule was modified in Georgia to provide that “All the property of the wife at the time of her marriage, whether real, personal or choses in action, shall be and remain the separate property of the wife, and that all property given to, inherited or acquired by the wife during coverture shall vest in and belong to the wife, and shall not be liable for the payment of any debt, default, or contract of the husband.” As a result of the U.S. Supreme Court ruling in Orr v. Orr, 440 U.S. 268 (1979), GA Code § 53-502 was amended to read: “The separate property of each spouse shall remain the separate property of that spouse except as provided in Code Title 30 and except as otherwise provided by law.” (Ga.L.1979, pp. 466, 489.) Stokes v. Stokes, 246 Ga. 765, 273 S.E.2d 169 (Ga., 1980).
Contact The Hughes Law Office For a free consultation 770-933-0780 www.MariettaDivorce.com.