Marital v Separate Property in Equitable Distribution
It is not rare in this day and age that a spouse “brings” a home into a marriage. This means that one spouse was the owner of a home before they got married. It also likely means that the spouse bringing the home into the marriage was paying the mortgage. It is typical that, upon marriage, all funds are co-mingled and “my money” becomes “our money.” That is the case even if the spouses keep separate accounts and only deposit their respective paychecks into their separate accounts. North Carolina is not a title-controls state. The acquisition of a piece of marital property is usually dependent on whether it was acquired during the marriage or not. (Note: law is complex and there are exceptions.) But what about the home?
I find it easiest to think of the home as a continuing acquisition. Each loan repayment is a small acquisition in a piece of the home. Equity is a term of art that partly encompasses this idea. Based on those facts, the home would be classified as a mixed asset. That means that there is a component that is separate and a component that is marital. The challenge is to determine the value of each of those components. Fortunately, there are formulas to aid in that determination.
First, the separate equity needs to be determined. Separate down payment, mortgage payments made before marriage, mortgage payments after separation (using non-marital funds): these can determine how much equity was acquired separately. Second, the marital equity needs to be calculated from equity acquired during the length of the marriage; this includes the reduction in principle that occurred while married and before separation.
These marital and separate equities can be expressed as a ratio, and the ratio can be applied to the fair market value of the property on the date of separation. It may also be applied to passive appreciation/depreciation in value of the property since separation and before distribution. As an example: Party A separately acquired 60% of the property, and the marriage acquired the remaining 40% (a 60/40 ratio). The FMV of the home on date of separation was 100,000. Then 60,000 of value in that home is separate, belonging to Party A. The marriage only acquired 40,000. Thus, only 40,000 is distributable by Equitable Distribution.
The above is a blending of two of the three steps in Equitable Distribution: classification and valuation. The correct classification for this type of asset is mixed marital and separate. Valuation is determined by a source of funds rule, i.e., where the money came from to pay for the home. Note that the above example assumes that money paid towards the mortgage is marital money. In some cases it is not, and an even larger percentage could be separate. In some cases, it is simple and logical, but in others it can become increasingly complex. If you have questions about mixed assets, speak to a family law expert.