ALLOCATING THE VALUE OF THE FAMILY HOMESTEAD

One contentious issue that arises in divorce proceedings is the division of the value of the homestead, the family home.   While often, the parties purchase the homestead during the marriage with marital property, allowing for an even 50/50 division, there many instances in which one party already owns a home at the time of the marriage, so there is nonmarital equity in the home from the outset.

In Mahowald v. Mahowald, A12-2243 (Minn. Ct. App. Sept. 9, 2013), the Minnesota Court of Appeals upheld the district court’s award of a portion of the current value of the homestead based on her premarital interest in the homestead to the wife. Before the parties were married in 1991, the wife had $7,400 in equity in the home, which amounted to 17.6% of the value of the home. The homestead at issue in Mahowald had been improved by the parties over the course of the marriage; they had added new siding, remodeled the kitchen, and added a new garage/shop. These improvements were marital property.

The district court calculated that 20% of the value of the homestead was attributable to the improvements made during the course of the marriage and, therefore, was marital property. Therefore, the court deducted the 20% of the value of the homestead first, leaving 80%, and then calculated the nonmarital portion owned by the wife as 17.6% of the balance (80%), or 14.08% of the total value of the homestead.

The court rejected the husband’s claim that nonmarital interest had been extinguished when the parties refinanced the home three times, relying on the Minnesota Supreme Court’s decision in Antone v. Antone and Minn. Stat. 518.003, subd. 3 (2013).

In Antone, the Minnesota Supreme Court held that a portion of the increased value of a home attributable to market forces is marital property and rejected the argument that refinancing eliminated marital property. The court explained the so-called “Schmitz rule,” as follows: “The present value of a nonmarital asset used in acquisition of marital property is the proportion the net equity or contribution at the time of acquisition bore to the value of the property at the time of purchase multiplied by the value of the property at the time of separation. The remainder of equity increase is characterized as marital property.” In applying this rule to the facts in Antone, the court said that the net equity at the time of the marriage is nonmarital property as it was acquired before the marriage. Then, when the parties used marital property to pay the mortgage, they created marital equity. The court held that refinancing the homestead did not amount to withdrawing nonmarital equity in the homestead. Thus, the case was remanded to the trial court to determine (1) the fair market value of the homestead on the date of the marriage and also at the dissolution of the marriage and (2) to apply the “Schmitz formula” to determine the marital and nonmarital interests in the homestead.

Anyone who has nonmarital funds invested in a homestead should consult with an experienced family law attorney before entering into a property settlement.