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Divorce and Determining Marital Values of Appreciating Real Estate

business-1-1246320-300x196By: W. Curtis Wiberg

In Denver area divorces, a court is charged with the responsibility of equitably dividing marital property under C.R.S. 14-10-113.  Marital property is generally defined as any property acquired during the marriage, regardless of how that property is titled.  The exception to this general rule is for property acquired by a spouse by gift or inheritance, or property brought into the marriage by a spouse (provided that that property is not comingled or gifted to the other spouse during the marriage).  These exceptions allow a court to characterize those items of property as a spouse’s “separate property.”

Even with these exception to the general rule, property brought into the marriage or acquired by gift or inheritance can gain value, or “appreciate,” during the marriage.  The increased portion gained on the separate property is considered marital property, and that gained value is something the court is properly charged with dividing.

The most common example of this is a spouse who has a 401(k) retirement account coming into a marriage. If that 401(k) account is worth $50,000 on the wedding day, and worth $100,000 on the day of divorce, even if the other spouse is not added to the account as a co-owner, $50,000 of that account is marital property.  In this example, it’s fairly straightforward to determine the marital value (provided the spouse kept account statements from the time of his wedding date). 

Where the marital appreciation question gets complicated is when the value of separate property on the wedding date is not that readily ascertainable.  Real estate is one such asset with which knowing the value as of the date of the wedding is difficult.  Let’s say a spouse owns his or her own house coming into the marriage, the other spouse moves in but the owner spouse never adds the other spouse to the deed or takes other action to allow the other spouse to make an ownership or co-mingling claim on this house.  In this scenario, presuming there is an increase in value, more than one value may need to be determined.  Specifically, the value at the time of marriage and the present value at the time of the divorce.

For exemplification purposes, let’s say the parties agree to sell the house as part of the divorce and it has a sale price of $400,000.  In this instance, a court can properly divide the appreciated value of the house during the marriage.  However, to do so, the value at the time of marriage must first be determined.  To ultimately arrive at the marital property value of the home, the parties will need to hire a real estate appraiser to conduct an “historical appraisal” (also known as a “retrospective appraisal.”)  Note that the current value is determined by the sale price.

A historical appraisal is performed when the situation requires an appraisal of property to determine Market Value as of a certain date, at some point in the past.  Many reputable real estate appraisers offer expert historical appraisals, though appraisers do charge varying rates.  To facilitate a historical appraisal, you may need to provide records such as deeds, inspection records or photographs that can substantiate the condition of the property at the time the records were created, or other information. The appraiser will also likely use historical market data of similar real estate sold (comparables) on or near the time of the date of marriage.

Using the above example of a house that sells for $400,000 at the time of divorce, if a historical appraisal expert determines that the home was worth $300,000 at the time of the marriage, then the court can find that $100,000 of that house’s value is properly considered marital property in a divorce, and award the non-titled spouse an equitable portion of that $100,000 (commonly, but not always, one-half).  In this example, the non-titled spouse would certainly gain a significant return on investment by hiring an expert historical appraiser in his/her divorce.  Additionally, it should be notes that this simple example is not really looking at equity and that equity is what is ultimately divided and can differ from “value.”

In some cases in which the home is not being sold, two appraisals may need to be done, one for current market value and one for past value.  This is often the case, as a court cannot make a divorcing spouse sell his or her separate or premarital property.   Sometimes, but not always, an appraiser doing both appraisals may be willing to discount cost.

If you have a situation where you may need an historical appraisal performed in your Colorado dissolution of marriage, or have other questions surrounding the division of assets and debts, contacting an experienced divorce attorney can be vital in making sure you get a fair and proper outcome.

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