Nonmarital real estate: is the appreciation marital, nonmarital, or a combination of both?

• Author: Nichols, Dawn D.
• Position: Florida

The recent skyrocketing rise in the value of Florida real estate has highlighted the issue of appreciation of nonmarital real property in the family law context. The issue of equitable distribution with respect to appreciation of real estate becomes more complicated when a trial court is faced with distribution of real property that was owned prior to the marriage or is inherited and that has appreciated substantially in value during the marriage. How is one to decide if the appreciation of nonmarital real estate is subject to equitable distribution?

The analysis regarding equitable distribution of assets necessarily begins with F.S. [section][section]61.075(3)(a) and (b). A court must first determine which assets are nonmarital and which assets are marital. When a spouse owns real estate prior to the marriage or inherits real estate during the marriage and leaves the property titled in his or her name, the asset itself remains nonmarital in nature. (1) It is only the enhancement in value and appreciation that becomes a marital asset. (2)

All five districts agree that if a separate asset is unencumbered and no marital funds are used to finance its acquisition, improvement, or maintenance, no portion of its value should ordinarily be included in the marital estate, absent improvement by marital labor. (3) In other words, passive appreciation of a nonmarital asset, without the infusion of marital funds or marital labor, is not subject to equitable distribution.

The district courts of appeal employ varying analyses when determining whether the appreciation of nonmarital real estate is subject to equitable distribution. The First, Third, Fourth, and Fifth districts all apply an "apportionment" approach, or variation thereof, when determining what portion of the appreciation should be equitably distributed between the parties. The Second District has taken a much more restricted view on the matter and only permits the nonowner spouse half the principal "pay down" of the mortgage that occurred during the marriage and does not allow the nonowner spouse to share in any portion of the market force appreciation (or passive appreciation) of the asset. (4)

The following legal discussion sets forth the different districts' handling of appreciation in the valuation of nonmarital real estate and shows the need for consensus when determining how to equitably address the issue of appreciation of nonmarital real estate when marital funds are used towards its acquisition, improvement, or payment of a mortgage.

First District Court of Appeal

The case that appears to best summarize the position of the First District Court of Appeal is Stevens v. Stevens, 651 So. 2d 1306 (Fla. 1st DCA 1995). An asset brought by one party to the marriage and which appreciates during the course of the marriage solely on account of inflation or market conditions becomes, in part, a marital asset if it is encumbered by debt that marital funds service. (5) For purposes of determining if an asset that is encumbered by indebtedness that marital funds service is marital in nature, each spouse's income is deemed marital funds. (6) Once it has been shown that marital labor or funds have been contributed, increases in value attributable to marital labor, funds, inflation, and market conditions will all apply. (7)

Once the threshold requirement of marital labor or funds has been met, the First District then applies an "apportionment" or "proration" method to equitably distribute the appreciation of the asset. The Stevens court sets forth the following in explaining the "apportionment" or "proration" method when a party has placed a nonmarital sum of money as a down payment and mortgage payments are paid with marital earnings during the marriage.

In general, in the absence of improvements, the portion of the appreciated value of a separate asset which should be treated as a marital asset will be the same as the fraction calculated by dividing the indebtedness with which the asset was encumbered at the time of the marriage by the value of the asset at the time of the marriage. If, for example, one party brings to the marriage an asset in which he or she has an equity of fifty percent, the other half of which is financed by marital funds, half the appreciated value at the time of the petition for dissolution was filed, [section]61.075(5)(a)2, Fla.Stat. (1993), should be included as a marital asset. The value of this marital asset should be reduced, however, by the unpaid indebtedness marital funds were used to service. (8)

As an example of the Stevens analysis, if a party purchases a home for $200,000 prior to the marriage and places a down payment of $50,000 toward its purchase, the appreciation would be equitably distributed as follows: (9) $150,000.00 (indebtedness at time of marriage) / $200,000.00 (value at time of marriage) = 75 percent.

According to the Stevens' analysis, at least 75 percent of the appreciation is a marital asset subject to equitable distribution. In this analysis, both the owner spouse and nonowner spouse receive a return on their investments. If the nonmarital residence appreciated by $100,000 and is valued at $300,000 at the time of the filing of the petition for dissolution of marriage, the nonowner spouse would be entitled to $37,500 (10) of the appreciated value, while the owner spouse would be entitled to the original down payment in addition to the remaining appreciation of $62,500. (11) The owner spouse not only keeps the original down payment but also receives a return on those funds. The nonowner spouse also receives a return on the marital funds based upon the above analysis. This analysis does not hinge on whether the appreciation is passive or active, but rather whether there was an infusion of marital funds applied toward the marital asset. It would logically follow that if the premarital asset is financed entirely by borrowed money that marital funds repay, the entire asset should be included in the marital estate. (12)

Once the nonowner spouse can show that marital funds were applied toward the nonmarital asset, there is a shifting of the burden of proof. Once a nonowner spouse establishes that marital labor or funds were used to improve a home that was nonmarital, the owner spouse has the burden to show which parts are exempt, otherwise the full appreciation is subject to equitable distribution. (13) Using the above example, if additional marital funds are used to improve the property, then the owner spouse would have the burden to show what portion of the remaining 25 percent appreciation is not attributable to improvements paid for with marital funds, otherwise the entire appreciation will be subject to equitable...