Going through a separation or divorce means dividing different types of assets. Personal property is fairly easy to divide: whoever has it, keeps it or gives it to the other spouse. A couple can divide their real estate with a court order or deed. A bank can transfer funds from joint accounts into individual accounts. Valuing and dividing property appreciation, however, may require an alternative solution.
Property appreciation is the growth in value of property over a period of time. In the context of a divorce, the issue of property appreciation often comes up when one spouse owned property in his own name before the marriage, free and clear of his wife. Although the spouse may be able to prevent his separate, premarital property from being valued in a divorce, the appreciation on that property may be an asset the court can distribute.
One way to separate property appreciation between two people in a divorce is to sell the property. For example, assume a woman owned 100 shares of stock with a total value, on the date of her marriage, of $1,000. During her five-year marriage, the stock appreciated in value so that its total value, on the date of her divorce, was $2,000. A judge could order her to sell the stock with the wife receiving $1,500 of the sale proceeds, representing $1,000 for her separate, premarital property, and the husband receiving $500 of the sale proceeds, representing his 50 percent share of the property appreciation on the stock during the marriage.
Another way to divide property appreciation in a marriage is to allow either the husband or wife to keep an item of property, including its appreciation during the marriage, and give the other spouse property to offset the item. For instance, suppose a husband owned a house with $60,000 in equity before he got married, and the house increased in value by $40,000, bringing its worth to $100,000 when he filed for divorce. In that case, a judge could set aside $60,000 as the husband's separate premarital property, let the husband keep the additional $40,000 in equity and allow the wife to keep an asset valued at $20,000 as an offset of her share of the husband's $40,000 of equity he acquired as the property appreciated.
Separating property appreciation in an asset such as a brokerage account is relatively easy. A couple can use old brokerage account statements to establish the premarital value, if any, of the account. Then they can calculate the appreciation on the premarital shares by comparing the present value of those shares to their value on the couple's wedding day. The difference in valuation on those two dates is property appreciation. The couple can then structure their marital settlement so that the account's original owner receives the premarital value of the account plus one-half of the property appreciation, and the other spouse receives one-half of the property appreciation. A judge then signs a divorce decree adopting the terms of their marital settlement agreement and the couple can serve a copy of the decree on the brokerage house, requiring the broker to divide a single joint account into two separate accounts, with each account valued according to the divorce decree.
A judge follows state law when dividing assets between a husband and wife in a divorce. The way the court divides separate property appreciation may depend on whether your state recognizes community property or uses an equitable distribution model to divide property in a divorce. In any event, you may receive more or less than one-half of property appreciation based on your state of residence. Online resources can help you determine what model your state follows for property division.
- Paul Katz/Photodisc/Getty Images