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Real Estate/Homestead Divisions
In a divorce, one of the most difficult issues is often what happens to the house the family lives in or other real estate. There are a number of options that must be considered when determining how real estate is to be divided in a divorce. That does not always mean that the real estate must be sold.
Determining Real Estate Value
The first step in dealing with real estate issues is to determine the value of the property. If the parties are unable to agree on the current market value, there are several valuation methods that can be used.
Equity is the true value of the asset of the property to the parties. It is determined by subtracting the encumbrances against the property from the Real Estate Value. Encumbrances may include any loans secured against the property including mortgages, second mortgages, home equity loans or secured lines of credit.
Under Minnesota case law, costs associated with a sale of the real estate are not deducted unless the home will actually be sold as part of the divorce.
Determining Marital vs. Non-Marital Equity
The second step is to determine what portion of the equity is marital and what is non-marital. Certain assets may be excluded from the marital estate which means that they are not divided between the parties. These are called non-marital assets. Any non-marital assets that you possess remain yours and any non-marital assets of your spouse remain the assets of your spouse. Under Minnesota Statutes Sec. 518.54, subd. 5 and existing case law, non-marital assets may include:
It is important to recognize that all assets are considered part of the marital estate unless proven otherwise by a "preponderance of the evidence." This places a significant burden on any person making a non-marital claim. It is essential that any and all documents including documents of title, receipts, or canceled checks that support your non-marital claims must be provided. Any failure to provide documentation may result in the division of the asset in the divorce.
The Schmitz formula is used in determining the marital versus non-marital interests in real estate. The formula provides a simplistic model to help determine non-marital interests in real estate. Since real estate mortgages and other encumbrances against property are paid off over a significant period of time, marital interests may be created in real estate that was owned by one party before the marriage. As encumbrances are paid off during the marriage, a marital interest is created.
The formula states that the proper calculation of a non-marital interest may be derived by determining the ratio of equity to market value at the time of the marriage and then using that same fraction to determine non-marital interest at the time of divorce. For example, lets assume a spouse owns a home prior to marriage and that home has a value of $100,000 at the time of the marriage and that is encumbered by a mortgage of $75,000. The $25,000 equity (the difference between the value and the encumbrance) becomes the numerator in the Schmitz formula and the value of $100,000 becomes the denominator. As a result, the non-marital interest is 25% of the home’s value. If the home appreciates to $200,000, the spouse with the non-marital interest may claim the first $50,000 as the non-marital interest and any remaining equity would be divided as marital.
The limitations of this formula are obvious. First of all, it may be very difficult to determine with any degree of accuracy the value of real estate at the time of marriage unless an appraisal is done at that time. That value alone may become a contested issue that results in litigation and testimony of experts.
Second, In many instances, mortgages are refinanced after marriage, second mortgages and home equity loans may also be incurred. These new debts may erase or partially erase a non-marital interest.
Third, the formula does not consider the effect that capital improvements made during the marriage have on the real estate value. Capital improvements that are made during the marriage and which increase the value of the real estate may erode some of the non-marital interest represented by the Schmitz formula.
Often, presenting a persuasive property case depends on clear cut documentation, and expert testimony. It is important to consult with a lawyer regarding significant non-marital issues.
Dividing the Asset
Once Marital versus non-marital interests are determined, the parties may discuss a division of the asset.
Occupancy/Ownership by One
If the real estate is awarded to one of the parties, the other party must be compensated for their share of the marital equity. This compensation may take one of several forms.
Sale and Division of Proceeds
When no other assets are available to equalize the division of property and the parties are either unable to afford the real estate or unable to refinance the real estate, the property may be sold and the proceeds divided.
Marital property, which is all assets and debts acquired during the marriage, is divided equitably, in a manner the Minnesota court believes is fair. Separate property is not considered marital property, and it includes property acquired before marriage, gifts and inheritances. The increase in value in this property is also separate property.
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