Nonmarital Real Estate: Is the Appreciation Marital, Nonmarital, or a Combination of Both?
The recent skyrocketing rise in the value of Florida real estate has highlighted the issue of appreciation of nonmarital real property in the family law context. The issue of equitable distribution with respect to appreciation of real estate becomes more complicated when a trial court is faced with distribution of real property that was owned prior to the marriage or is inherited and that has appreciated substantially in value during the marriage. How is one to decide if the appreciation of nonmarital real estate is subject to equitable distribution?
The analysis regarding equitable distribution of assets necessarily begins with F.S. §§61.075(3)(a) and (b). A court must first determine which assets are nonmarital and which assets are marital. When a spouse owns real estate prior to the marriage or inherits real estate during the marriage and leaves the property titled in his or her name, the asset itself remains nonmarital in nature.1 It is only the enhancement in value and appreciation that becomes a marital asset.2
All five districts agree that if a separate asset is unencumbered and no marital funds are used to finance its acquisition, improvement, or maintenance, no portion of its value should ordinarily be included in the marital estate, absent improvement by marital labor.3 In other words, passive appreciation of a nonmarital asset, without the infusion of marital funds or marital labor, is not subject to equitable distribution.
The district courts of appeal employ varying analyses when determining whether the appreciation of nonmarital real estate is subject to equitable distribution. The First, Third, Fourth, and Fifth districts all apply an “apportionment” approach, or variation thereof, when determining what portion of the appreciation should be equitably distributed between the parties. The Second District has taken a much more restricted view on the matter and only permits the nonowner spouse half the principal “pay down” of the mortgage that occurred during the marriage and does not allow the nonowner spouse to share in any portion of the market force appreciation (or passive appreciation) of the asset.4
The following legal discussion sets forth the different districts’ handling of appreciation in the valuation of nonmarital real estate and shows the need for consensus when determining how to equitably address the issue of appreciation of nonmarital real estate when marital funds are used towards its acquisition, improvement, or payment of a mortgage.
First District Court of Appeal
The case that appears to best summarize the position of the First District Court of Appeal is Stevens v. Stevens, 651 So. 2d 1306 (Fla. 1st DCA 1995). An asset brought by one party to the marriage and which appreciates during the course of the marriage solely on account of inflation or market conditions becomes, in part, a marital asset if it is encumbered by debt that marital funds service.5 For purposes of determining if an asset that is encumbered by indebtedness that marital funds service is marital in nature, each spouse’s income is deemed marital funds.6 Once it has been shown that marital labor or funds have been contributed, increases in value attributable to marital labor, funds, inflation, and market conditions will all apply.7
Once the threshold requirement of marital labor or funds has been met, the First District then applies an “apportionment” or “proration” method to equitably distribute the appreciation of the asset. The Stevens court sets forth the following in explaining the “apportionment” or “proration” method when a party has placed a nonmarital sum of money as a down payment and mortgage payments are paid with marital earnings during the marriage.
In general, in the absence of improvements, the portion of the appreciated value of a separate asset which should be treated as a marital asset will be the same as the fraction calculated by dividing the indebtedness with which the asset was encumbered at the time of the marriage by the value of the asset at the time of the marriage. If, for example, one party brings to the marriage an asset in which he or she has an equity of fifty percent, the other half of which is financed by marital funds, half the appreciated value at the time of the petition for dissolution was filed, §61.075(5)(a)2, Fla.Stat. (1993), should be included as a marital asset. The value of this marital asset should be reduced, however, by the unpaid indebtedness marital funds were used to service.8
As an example of the Stevens analysis, if a party purchases a home for $200,000 prior to the marriage and places a down payment of $50,000 toward its purchase, the appreciation would be equitably distributed as follows:9 $150,000.00 (indebtedness at time of marriage) ÷ $200,000.00 (value at time of marriage) = 75 percent.
According to the Stevens’ analysis, at least 75 percent of the appreciation is a marital asset subject to equitable distribution. In this analysis, both the owner spouse and nonowner spouse receive a return on their investments. If the nonmarital residence appreciated by $100,000 and is valued at $300,000 at the time of the filing of the petition for dissolution of marriage, the nonowner spouse would be entitled to $37,50010 of the appreciated value, while the owner spouse would be entitled to the original down payment in addition to the remaining appreciation of $62,500.11 The owner spouse not only keeps the original down payment but also receives a return on those funds. The nonowner spouse also receives a return on the marital funds based upon the above analysis. This analysis does not hinge on whether the appreciation is passive or active, but rather whether there was an infusion of marital funds applied toward the marital asset. It would logically follow that if the premarital asset is financed entirely by borrowed money that marital funds repay, the entire asset should be included in the marital estate.12
Once the nonowner spouse can show that marital funds were applied toward the nonmarital asset, there is a shifting of the burden of proof. Once a nonowner spouse establishes that marital labor or funds were used to improve a home that was nonmarital, the owner spouse has the burden to show which parts are exempt, otherwise the full appreciation is subject to equitable distribution.13 Using the above example, if additional marital funds are used to improve the property, then the owner spouse would have the burden to show what portion of the remaining 25 percent appreciation is not attributable to improvements paid for with marital funds, otherwise the entire appreciation will be subject to equitable distribution.
Dyson v. Dyson, 597 So. 2d 320 (Fla. 1st DCA 1992) also employs an “apportionment” or “proration” approach. Once an asset is classified as a marital asset, the parties are entitled to an equitable distribution in any increase in value caused by inflation or market conditions.14 In Young v. Young, 606 So. 2d 1267 (Fla. 1st DCA 1992), the First District held that a trial court errs in refusing to distribute equitably the appreciated value of the marital home caused by inflation, market conditions, or improvementsmade on a residence during the marriage, even though the home may itself be the separate property of one’s spouse.15 It is clear from the above decisions that the First District has fashioned a remedy that allows both parties to receive a return on their respective invested funds. The more equity the owner spouse has in the nonmarital asset, based upon nonmarital contributions, the greater his or her percentage will be at the time appreciation is to be distributed. The nonowner spouse will also receive a return on the investment of marital funds rather than just one half the principal “pay down” of the mortgage.
Third District Court of Appeal
The rulings in the Third District Court of Appeal follow closely with the First District. The Third District utilizes an “apportionment” approach but couches it in the terms of “special equity.” In Griffiths v. Griffiths, 563 So. 2d 773, 774-775 (Fla. 3d DCA 1990), the court held that a spouse contributing a special equity should also receive the related appreciation thereon, not merely a return of the original funds determined to be a special equity.16 As discussed above, the Stevens case also apportions the appreciation between the owner and nonowner spouse utilizing a similar formula to equitably distribute the appreciation.
The Third District also applies the burden adopted in the First District. In Herrera v. Herrera, 895 So. 2d 1171 (Fla. 3d DCA 2005), the husband acquired title to a home prior to the marriage and kept it titled in his name. The court found that the husband in Herrera had used marital funds to pay the mortgage on the property and had built an addition, a den, onto the premarital home.17 The husband in Herrera argued that the funds used to pay for improvements on the marital home were nonmarital; however, he was unable to meet his burden to prove that said funds were nonmarital in nature. The court held that the increased equity in the husband’s premarital home was a marital asset subject to equitable distribution, given that the husband failed to meet his burden of showing that funds used for expenditures on the home were nonmarital, and the increased equity in value of the husband’s premarital home properly was divided equally between the parties.18
In Yitzhari v. Yitzhari, 906 So. 2d 1250 (Fla. 3d DCA 2005), the Third District held that once it was established that marital labor or funds were used to improve assets, the burden then shifted to the owner spouse to show that some, if any, portion of the enhanced value was exempt from equitable distribution. Both the First and Third districts further hold that if the owner spouse is unable to prove that a portion of the appreciation is exempt from equitable distribution, then the entire appreciation should be equally divided between the owner spouse and nonowner spouse.
Fourth District Court of Appeal
A review of the real estate appreciation cases of the Fourth District seems to indicate that the Fourth District has wavered somewhat in its analysis when determining if appreciation of nonmarital real estate is marital or nonmarital.
In Reich v. Reich, 652 So. 2d 1200 (Fla. 4th DCA 1995), the Fourth District followed the First District and equitably distributed the appreciation of the real estate based upon the formula used in Stefanowitz v. Stefanowitz, 586 So. 2d 460, 462 (Fla. 1st DCA 1991).19 Several months later in Cole v. Roberts, 661 So. 2d 370 (Fla. 4th DCA 1995), the Fourth District declined to equitably distribute any of the appreciation of the real property, instead only permitting the nonowner spouse half the marital funds contributed toward reducing the mortgage debt on the condominium. The nonowner spouse in Cole was not entitled to any share of the appreciation even though marital funds had serviced the mortgage.
Shortly after the Reich and Cole decisions, the Fourth District issued a ruling in Oldham v. Oldham, 683 So. 2d 579 (Fla. 4th DCA 1996). The Fourth District Court of Appeal in Oldham held that if the nonmarital property is encumbered by a mortgage and marital funds are expended to service the mortgage or to pay taxes, the property then becomes marital even if the enhanced value is due solely to market forces.20 Although the cases from the different districts ruling on appreciation of nonmarital real estate are very fact specific, the seemingly inconsistent rulings from the Fourth District are difficult to explain. The facts in the above Fourth District cases are not so different as to justify the vastly differing results.
The Fourth District, in Barner v. Barner, 716 So. 2d 795 (Fla. 4th DCA 1998), recognized the Oldham case in its ruling. Although Oldham implied that any marital funds paid toward nonmarital real property converted the entire appreciation into a marital asset, the court in Barner stated that the trial court should consider whether the marital labor or funds expended on a nonmarital asset resulted in its appreciation. The court in Barner held that paying for the taxes, seedlings, and replanting were routine maintenance expenses and the payment of these expenses may or may not have improved the property.21 Barner is not a strict real estate case in that a business, timber farming, was the main use of the property. The income generated by timber sales far exceeded the expenses, including property taxes, paid for by the parties during the marriage.22The net income was enjoyed by both parties during the marriage and the nonowner spouse received a benefit in excess of the marital funds that were applied toward the property.23
There are two remaining real estate appreciation cases out of the Fourth District. In Reyes v. Reyes, 714 So. 2d 646 (Fla. 4th DCA 1998), the case was remanded and the trial court was ordered to consider whether the mortgage was serviced with marital funds, if there were perhaps improvements made with marital funds, and whether the value of the home may have appreciated during the marriage. The court held that the wife may very likely have acquired a marital interest in the husband’s premarital property; however, few facts of the case were discussed, and the court gave no instruction as to how the appreciation would be allocated between the parties.
The last real estate appreciation case out of the Fourth District is Caruso v. Caruso, 814 So. 2d 498 (Fla. 4th DCA 2002). The Caruso case is not instructive, as it improperly refers to the nonowner spouse’s claim to the appreciation of the nonmarital asset as a “special equity” and holds that because the nonowner spouse failed to plead a claim for “special equity,” she could not be awarded the relief.24 A thorough discussion of “special equity” is beyond the scope of this article;25 however, the Caruso court improperly utilized the term in its application to the interests of the respective parties.
It is unclear from the above cases if the Fourth District would follow the Oldham case or if the court would employ a different analysis. Later Fourth District cases, Chapman v. Chapman, 866 So. 2d 118 (Fla. 4th DCA 2004), and O’Neill v. O’Neill, 868 So. 2d 3 (Fla. 4th DCA 2004), seem to imply the Fourth District may be amenable to an “apportionment” approach when dividing appreciation of nonmarital assets. Chapman and O’Neill, however, do not address real estate and, therefore, are not otherwise included in this analysis.
Fifth District Court of Appeal
An analysis of the Fifth District cases that address real property seems to indicate that the owner spouse is allowed to keep his or her nonmarital contributions and then equitably divide the increased equity and appreciation between the parties. In Maselle v. Maselle, 622 So. 2d 1359 (Fla. 5th DCA 1993), the court held that substantial appreciation in the value of a beach resort located on property which the husband reacquired after the marriage through foreclosure was subject to equitable distribution where the increase in value was brought about by the parties’ joint labor and by mortgages paid off by operation of the marital business on the property. The appellate court held the proceeds from the sale of the property, after deducting the premarital equity regained by the husband through the foreclosure and reacquisition as well as the contributions made by the husband from other premarital assets in the additions and improvements to the property, should be divided equally between the parties.26 There were no discussions in Maselle, however, about granting the husband any growth on his nonmarital contributions.27 The increase in equity and appreciation were divided equally between the parties.28
In Thomas v. Thomas, 776 So. 2d 1092 (Fla. 5th DCA 2001), the Fifth District reversed the lower court’s ruling that the increased equity in the former husband’s premarital home resulting from the reduction in the principal balance on the mortgage was marital property, but that the increases in value caused by market appreciation and home improvements were nonmarital. It appears that the Fifth District, like the First and Third Districts, shifts the burden to the owner spouse to prove what nonmarital funds, if any, were invested in the nonmarital property. In Thomas, the Fifth District held that the increased equity in the former husband’s premarital home attributable to improvements was marital property subject to equitable distribution where he failed to adequately trace home improvement payments to nonmarital funds.29 There was no discussion as to whether the former husband in Thomas received any appreciation on his nonmarital contributions from prior to the marriage, as it appears from the ruling that the entire appreciation was subject to equitable distribution.
In Becker v.Becker, 639 So. 2d 1082 (Fla. 5th DCA 1994), the Fifth District cited the First District cases Moon v. Moon, 594 So. 2d 819, 822 (Fla. 1st DCA 1992), and Turner v. Turner, 529 So. 2d 1138 (Fla. 5th DCA 1998), when it held that “the enhanced value of the premarital asset becomes a marital asset and further enhancement in value of such marital asset due to inflation or market conditions will become a marital asset.”30 In Becker, the appreciation of a nonmarital office building was deemed not to be a marital asset because traceable monies from another nonmarital source (rental income) were used to pay off the mortgage on the nonmarital office building. It appears that if marital funds had been used to pay down the mortgage on the nonmarital office building, then the appreciation due to market conditions would have been subject to equitable distribution. Although the Becker case cites Moon and Turner, which are both First District cases, there are no Fifth District cases which actually apply the “apportionment” approach to real estate. In Maselle and Thomas, it is unknown whether the court’s decision to subject the entire appreciation to equitable distribution was caused by the owner spouse’s failure to meet his burden of proving that a portion of the appreciation was nonmarital, or by the contribution of marital funds or marital labor. It is unclear then, based upon the existing Fifth District cases, whether the district would apply the “apportionment” approach to distribute the appreciation between the parties, or whether the entire appreciation would be subject to equitable distribution based upon the contribution of marital funds and/or marital labor.
A case out of the Fifth District that has garnered significant attention is Sizemore v. Sizemore, 767 So. 2d 545 (Fla. 5th DCA 2000), which holds that asset appreciation is subject to equitable distribution where marital labor contributes to its value, even where the increased value is primarily created by passive inflation. Sizemore, however, addresses a nonmarital stock account, and not real estate. Even though Thomas was decided after Sizemore, the Fifth District did not cite Sizemore in Thomas. The Thomas case discussed a shifting of the burden once it is shown that marital funds have been applied toward a nonmarital asset. Sizemore does not seem to recognize a shift of burden, but rather states that once marital funds are applied toward or invested in a nonmarital account, the entire appreciation is marital. It would seem then that Sizemore does not apply to our analysis of appreciation of nonmarital real property. Based upon the language in Becker and the holding in Thomas, it would appear that the Fifth District would apply the analysis of the First and Third Districts. Once it can be shown that marital funds or labor have been contributed toward a nonmarital asset, the burden would then shift to the owner spouse to prove what nonmarital funds, if any, were contributed to the nonmarital asset. If the owner spouse is unable to meet the burden of proving what nonmarital funds were invested in the nonmarital property, then the entire appreciation would be subject to equitable distribution.
Second District Court of Appeal
The Second District seems to imply in Mitchell v. Mitchell, 841 So. 2d 564, 567 (Fla. 2d DCA 2003), that there is a conflict between itself and the other districts. The court in Mitchell reversed the lower court for relying on Sizemore v. Sizemore, 767 So. 2d 545, 547 (Fla. 5th DCA 2000). The trial court in Mitchell had concluded that a marital contribution to an asset’s value subjects the entire appreciation of the asset to equitable distribution, even if the increased value is primarily created by passive appreciation.31 That is not the law in the Second District according to Mitchell. The Mitchell court held that where the increase in market value is attributable to “inflation or fortuitous market forces,” the expenditure of marital funds on the nonmarital asset does not transform the appreciated asset into marital property.32
The Mitchell court declined to follow Stevens v. Stevens, 651 So. 2d 1306 (Fla. 1st DCA 1995), and Sizemore when it remanded the case back to the trial court to calculate the amount by which marital funds reduced the mortgage indebtedness in order to equitably distribute to the wife only her share of the principal pay down of the mortgage.33 It appears that the difference between the Second District and the remaining districts is that if it can be shown that the appreciation is solely passive, even though there has been an infusion of marital labor or funds, the Second District only reimburses the nonowner spouse half the principal “pay down” of the mortgage and only one half the appreciation directly attributable to improvements. Marital funds can be used toward improvements, but if the improvements do not enhance the value of the asset, the appreciation is not subject to equitable distribution.34
The flaw with the analysis of the Second District is that it does not allow the nonowner spouse a return on the investment of marital funds. The owner spouse receives a windfall, since he or she will receive the full amount of appreciation even though marital funds serviced the mortgage during the entire marriage. If, for example, the parties are married for a period of 20 years with marital funds servicing the mortgage during that time period, how could it possibly be equitable only to allow the nonowner spouse reimbursement for half the principal “pay down” of the mortgage? Is the nonowner spouse not entitled to any return on the investment of marital funds which are in essence “purchasing” an interest in the property throughout the marriage? Would it not be more prudent for the nonowner spouse to invest the marital funds elsewhere so that the nonowner spouse could at least expect some return on the investment? How is it fair for the nonowner spouse to allow marital funds to be invested in the real property and expect absolutely no return on the funds while the owner spouse receives all of the appreciation?
Under the analysis of the First, Third, and Fifth districts, once it is shown that marital funds have been used toward the acquisition, improvement, or enhancement in value of nonmarital real estate, the burden then shifts to the owner spouse to show what, if any, nonmarital funds were used toward the nonmarital real estate. If the owner spouse is able to account for a nonmarital contribution, the First and Third districts clearly require that an “apportionment” approach be applied to determine which portion of the appreciation is subject to equitable distribution. Based upon the language of Maselle, Becker, and Thomas out of the Fifth District, it appears that once the nonowner spouse shows a marital contribution has been made to the nonmarital asset, the burden then shifts to the owner spouse to prove what nonmarital funds were contributed to the asset. If the owner spouse fails to meet his or her burden, then the entire appreciation is subject to equitable distribution.
The Fourth District’s analysis appears to most closely follow the First, Third, and Fifth districts; however, the rulings in all of the districts show a need for some consensus on the issue of appreciation of nonmarital real estate. A family law practitioner, at present, can find a real estate appreciation case to stand for whatever position he or she wishes to promote in any given case. This lack of consistency has made it next to impossible to advise a client as to how to resolve the issue of appreciation of nonmarital real estate without protracted and expensive litigation.
The First and Third districts provide the most equitable procedure for determining how to divide appreciation of nonmarital real estate between the parties. The owner spouse receives credit for his nonmarital contributions and a portion of appreciation representing growth on those funds. The nonowner spouse also receives some appreciation based upon the investment of marital funds or labor to the nonmarital asset. Although the formulas in the First and Third districts do not take into consideration the “dollar weighted method,”35 each party is able to receive some return on the investment of the respective funds. It seems absolutely inequitable for parties to invest marital funds in mortgage payments and give all of the appreciation to the owner spouse and only half the principal pay down of the mortgage to the nonowner spouse.
1 Martin v. Martin, 923 So. 2d 1236, 1237 (Fla. 1st D.C.A. 2006).
3 Stevens v. Stevens, 651 So. 2d 1306 (Fla. 1st D.C.A. 1995). See also Knecht v. Knecht, 629 So. 2d 883, 887 (Fla. 3d D.C.A. 1994); Oldham v. Oldham, 683 So. 2d 579 (Fla. 4th D.C.A. 1996); Wright v. Wright, 505 So. 2d 699 (Fla. 5th D.C.A. 1987) (holding that if no marital efforts, earnings, or funds were used to acquire asset or to enhance its value, asset and any appreciated value are not subject to equitable distribution).
4 Straley v. Frank, 612 So. 2d 610, 612 (Fla. 2d D.C.A. 1992).
5 Stevens, 651 So. 2d at 1306.
6 Id. at 1307.
7 Turner v. Turner, 529 So. 2d 1138, 1141 (Fla. 1st D.C.A. 1988).
8 Stevens, 651 So. 2dat 1307-1308.
9 This calculation does not take into consideration any improvements that may have been made to the subject property.
10 This figure was calculated by dividing the marital portion of appreciation ($75,000) in half giving each party $37,500 as their respective share of marital appreciation.
11 This figure was calculated by giving the owner spouse $25,000 (his or her nonmarital share of appreciation) in addition to his marital share of appreciation of $37,500 for a total of $62,500 to be awarded to the owner spouse.
12 Stevens, 651 So. 2d at 1307.
13 Gaetani-Slade v. Slade, 852 So. 2d 343, 347 (Fla. 1st D.C.A. 2003) (citing Adkins v. Adkins, 650 So. 2d 61, 68 (Fla. 3d D.C.A. 1994)).
14 Dyson,597 So. 2d at 324-325.
15 Young, 606 So. 2d at 1270.
16 See also Jahnke v. Jahnke, 804 So. 2d 513, 518 (Fla. 3d D.C.A. 2001) (which holds that the appreciation of the nonmarital property be equitably distributed using the “special equity” formula set forth in Landay v. Landay, 429 So. 2d 1197 (Fla. 1983) and Griffiths).
17 Herrera, 895 So. 2d at 1174.
19 Stefanowitz was decided prior to Stevens but used a formula similar to the one later set forth in Stevens.
20 Oldham,683 So. 2d at 580 (citing Stevens, 651 So. 2d 1306).
21 Barner, 716 So. 2d at 796. The wife in Barner had inherited the timberland prior to the marriage and there was no reference cited in the case as to whether mortgage payments were paid during the marriage.
22 Id. at 797-798.
24 Caruso, 814 So. 2d at 504.
25 For a through discussion of special equity see Victoria Ho & Rebecca Y. Zung, Special Equity and Unequal Distribution of Assets,75 Fla. B. J. 79 (Nov. 2001). See also Thomas v. Thomas, 776 So. 2d 1092 (Fla. 5th D.C.A. 2001) (wherein the court rejected the owner spouse’s contention that the nonowner spouse’s claim was barred because she did not plead a “special equity.”)
26 Maselle,622 So. 2d at 1359.
27 Id. at 1359-1360.
28 Id. at 1359.
29 Thomas, 776 So. 2d at 1095.
30 Moon v. Moon, 594 So. 2d 819, 822 (Fla. 1st D.C.A. 1992) (citing Turner v. Turner, 529 So. 2d 1138 (Fla. 1st D.C.A. 1988)).
31 Mitchell, 841 So. 2d at 567.
32 Id. (citing Straley v. Frank, 612 So. 2d 610, 612 (Fla. 2d D.C.A. 1992)).
33 Id. at 567.
34 Straley, 612 So. 2d at 610.
35 See A. Matthew Miller & Jerry Reiss, Determining the Nonmarital Portion of Retirement Benefits and Other Property, 81 Fla. B. J. 34 (Feb. 2007).
Sean K. Ahmed is a partner with Nichols & Ahmed, P.A., in Daytona Beach. Mr. Ahmed received a B.A. from the University of Florida and a J.D. from the University of Florida. His practice includes marital law and family law litigation.
Dawn D. Nichols is a partner with Nichols & Ahmed, P.A., in Daytona Beach. Ms. Nichols received a B.A. from the University of Florida and a J.D. from the University of Florida. She is certified in marital and family law.
This column is submitted on behalf of the Family Law Section, Allyson Hughes, chair, and Susan W. Savard, editor.