The Marital Residence and Separate Property

January 24, 2007
By Clifford Petroske

For most people, their most valuable asset is their home. If your home was purchased during your marriage and is titled jointly in the names of you and your spouse, dividing this asset in a divorce would seem to be a simple matter – sell it and split the proceeds equally. In some cases it is, in fact, a straightforward transaction. However, fairness (and the law) dictate a different result if one of the parties contributed their separate property to the purchase or improvement of the property during the marriage. In other words, even though the house is legally titled in both parties’ names and is a marital asset purchased during the marriage, one of those parties could walk away from the sale with more – maybe most – of the proceeds of sale.

How could this be? From a property law (as opposed to matrimonial law) perspective it makes no sense. After all, when a married couple purchase real estate together the resulting form of title known as “tenants by the entirety” prescribes ownership by each of the parties of an overlapping whole interest in the property. This overlapping ownership of the “whole pie” is what keeps a judgment creditor from foreclosing its judgment lien against the residence, since the other “innocent” spouse’s interest cannot be separated out.

The answer to how a jointly owned home can end up unequally divided in a divorce, lies in the case law interpreting the Domestic Relations Law which seeks to preserve separate property rights in the face of jointly titled home ownership. Separate property is property that, despite a divorce judgment in which all other property is split up, one of the spouses gets to keep without sharing with the other spouse. It is narrowly defined by statute, and includes property owned by one of the parties prior to the marriage, property received as a gift or inheritance during the marriage, and property (money) received as compensation for personal injuries during the marriage. Usually, separate property only remains separate when a spouse keeps it titled in his or her separate name. For example, if you combined bank accounts into joint checking and savings when you got married, you cannot get the money you contributed back in a divorce even where you contributed most of the money into those joint accounts. The monies are considered “commingled” and no longer separate.

However, in the limited circumstance of separate property investment into real property, the opposite is true. For example, when one spouse walks into the marriage with a large bank account and keeps that account in his or her sole name until that happy day when the happy couple purchase a home together using those funds as the down payment toward the purchase, the spouse who contributed those funds can expect — even without a pre-nuptial agreement – to walk away from a divorce recovering all of that initial investment before his or her spouse gets a dime from the proceeds of the sale of the home. Only the actual amount of the separate property investment is recovered – there is no interest, nor pro rata appreciation that works to enhance the invested monies.

A similar result can occur when the house itself was owned by one of the parties prior to the marriage, and then placed into joint name during the marriage. This is fairly common with second marriages, where one of the spouses obtained the house in the first divorce, or where the house was received by one spouse as an inheritance prior to or during the marriage. Often, to avoid probate, the other spouse will be added to title. Later, should the parties need to divide the home as part of a divorce action, the spouse who owned the house prior the marriage may, before any portion of the proceeds of sale is shared with the other spouse, receive back the value of the house as it was valued on the date of the transfer into joint name. This is not necessarily the result, however; technically, the prior-owning spouse’s separate property interest in the residence was “commingled” when title was transferred into joint name. The trial court’s role in dividing the residence is to apply equitable factors to the division of marital (not separate) property. It is conceivable that the prior-owning spouse’s interest would be less than the value of the residence at the time of transfer into joint name, where the other spouse contributed directly (or indirectly) to paying off the mortgage, or where improvements paid for with marital funds, were made to the residence prior to the transfer into joint name. In other words, it is not an automatic return of investment, as when the house is purchased during the marriage with separate property funds.

Even if the title to the marital residence remains solely in the name of one spouse and is never transferred into joint names, the other spouse can share in the value of the residence in a divorce. Look for a discussion of the rules concerning the appreciation of separate property in a future article on this website.