Arizona is a community property state. Property acquired by either spouse during the marriage is presumed to belong to the spouses together, as community property. Same for income earned. Property already owned prior to the marriage, or obtained through gift or inheritance, is separate property. In addition, the spouses can agree that what would otherwise be separate property is to be community property, and vice versa.
But most people don’t keep things neat. Which is why it is so important to have a Phoenix Divorce Lawyer to help sort it out.
A common situation: real estate starts off as separate property–the down payment is made with separate funds, the mortage is a separate debt, and the title is in the name of one spouse only–but then community funds are used to pay down the mortgage. How is the property division handled in the event of
divorce? This was discussed in the recent case of
Valento v. Valento.
The separate property does not become community property. But Arizona recognizes a "community lien" or "equitable lien" against the separate property. See Tester v. Tester, a 1979 case. In deciding the amount of this lien, Arizona usually looks at the property value on the date the community is dissolved–the so-called "value at dissolution" approach. In the 2009 case of
Barnett v. Jedynak, the Court of Appeals prescribed a formula for valuing the lien when the property appreciates during the marriage: C + [C/B x A]; where A = appreciation in value of the property during the marriage, B = value on the date of marriage, and C = community contributions to principal (i.e., C = the amount by which community funds paid down the mortgage principal; that portion of the monthly payment which goes to interest–which is most of the payment in the early years, typically–does not count).
So if the wife had a house worth $300,000 when the couple got married, with a mortgage balance of $250,000, and during the marriage community funds were used to pay down the principal by $50,000, C/B = $50,000/$300,000 = 1/6th. So the community is responsible for 1/6th of the value on the date of the marriage. Consequently, it is fair for the community to get 1/6th of any appreciation as well, plus the $50,000 contributed to paying down the principal. So if the property value is $360,000 on the date of dissolution, the community is entitled to 1/6th of the appreciation of $60,000, or an additional $10,000, in addition to the $50,000 in principal payments. The calculation is:
C + (C/B * A) = 50,000 + (50,000/300,000 * 60,000) = 50,000 + (1/6 * 60,000) =
50,000 + 10,000 = $60,000
"Contributions to principal" may consist not only of the reduction of a loan balance, but also those contributions that can be proven to have increased market value and thereby increased equity. Of course, some improvements to property may be the equivalent of contributions to principal, while others may have no material effect on market value.
But, as we have learned all too well in recent years, property values do not always go up. Sometimes they go down. A lot. What then?
In Valento, the wife, who owned the separate property, argued that in a depreciating market, there is no lien at all. The Court rejected this argument. The Court instead said that essentially the same formula applies, except that we let A–the amount of appreciation--be a negative number:
C + (C/B * -A), where -A is the negative appreciation–i.e., the depreciation.
Remember from junior high math that instead of having letting A be a negative number, you can let it be a positive number signifying the amount of depreciation, and move the minus sign in front of the parentheses: C - (C/B + D)
Obviously, this gets complex. The difficult is not so much the formula, but rather coming up with the numbers to plug into the formula. What is the value of the real estate now? What was the value then? How much was contributed towards improvements, and how much did those improvements affect property value? You don’t want to get involved in this without the expert legal advice of a hard fighting, straight talking attorney.
The practical effect of this formula is that the community is responsible for a proportionate amount of the depreciation in a falling market (which will be deducted from the community lien), just as the community is responsible for a proportionate amount of the appreciation in a rising market (which will be added to the community lien). That has a certain symmetry, but one can imagine counter-arguments. It is striking, though, that the Court never actually defended this position; in fact, there is no indication in the opinion that the Court actually recognized that this was the effect of its formula. The Court simply never mentioned it.
If the community has made mortgage payments and helped pay down the principal, it makes sense to credit the community with a proportionate share of the appreciation as well; had the community not made the payments, the property would have been foreclosed on, and there would have been no appreciation at all. So the community is, in a real sense, actually responsible for part of the appreciation. It is hard to see, however, any corresponding way in which the community is actually responsible for a share of the depreciation in a falling market.
Look for this issue to be raised again.