Question: When my husband and I married, he owned a home. It was in his name but not paid off; we paid the mortgage together and made small improvements over time. Later, I became disabled. I took some money that I had – a little bit from an inheritance, and some from my retirement accounts – and made the house handicap accessible. Now, we’re getting a divorce. What happens now?
This is such a great question and one that quickly gets technical – so it may be hard to find the answer to the question in a regular online search. Let’s get into it.
So, in Virginia, we classify property first, before it is divided. There are three categories: separate, marital, and hybrid.
Separate property is not divisible in divorce; it belongs solely to one party. Separate property is anything that was earned, purchased, or acquired during the marriage, or any gift (from someone other than your spouse), inheritance, personal injury settlement, trust fund or similar interest/asset that does not exist as a result of the contributions of the parties to the marriage.
Marital property is divisible in divorce. Marital property is anything earned, purchased, or acquired during the marriage, including debt, and regardless of title.
Hybrid property is part marital and part separate; the marital portion is divisible and the separate portion, if it is traceable and it hasn’t been commingled to such a degree that we can’t separate it out from the parties’ marital assets, is not divisible. We often see hybrid assets in cases like this, with larger assets, like a house or a retirement account.
How would the house here be classified under Virginia law?
I might need a few more details, but I suspect that this house is a hybrid asset. To the extent that Husband purchased it before marriage, presumably put down a down payment and made mortgage payments up until the parties married, it is separate. That is why it is in his separate name. But simply existing in one party’s sole and separate name does not mean that the asset in question is, in fact, the sole and/or separate property of the party whose name is on it. Marital assets are marital regardless of title, and this definitely applies here.
To the extent that mortgage payments were made from the parties’ income after marriage, it would be at least a hybrid asset. (If the payments were made, instead, from a separate source of income – like from husband’s trust fund, from a separate account with separate funds that existed prior to the marriage and into which marital funds were not mixed, or if a tenant lived in the home and made monthly rent payments that covered the mortgage so that no actual marital funds went into the home – it might remain entirely separate.)
I suspect that this house would be hybrid; in a divorce, we’d separate out the part that was separate (down payment and mortgage payments made prior to marriage) and the part that was marital. Since it’s in his name, he’d likely keep the home and have to buy out the other party, but it is possible that he could agree to sell his interest to you, too, especially since this particular home is fitted for your specific needs.
But, in that instance, we’d need to reach an agreement, and you’d likely have to qualify to at least refinance the home into your name, which may include (if you didn’t have a different way of making up the difference) both the existing mortgage balance AND his portion of the equity in the home. If his down payment and/or mortgage payments prior to the marriage amount to a good chunk of change, this may be easier or harder to do. You will definitely want to talk to a mortgage lender to get an idea of whether this would be possible – and, of course, work out whether this might (or might not) be something to which your husband would agree.
What about the improvements, made from Wife’s money?
To the extent that the improvements increased the value of the property, these would be a marital asset.
The marital money that Wife put in is also marital – and, specifically, I am thinking here of the money that came from her retirement account. The same formula would apply; to the extent that money was in the account prior to marriage, this would be Wife’s separate property. The amount that was contributed during the marriage, though, would be marital. So, even if Wife’s account is liquidated to cover the cost of improvement, it would be recoverable from the sale or refinance of the home. (And, also, she would still maintain her interest in the retirement that he was able to save during the marriage as well.)
It’s possible, though, that handicap improvements don’t improve the value of the home – or, worse, that they depreciate it because they aren’t “improvements” in the sense of an updated bathroom or kitchen. Handicap accessible improvements might make the home inaccessible to an able bodied person, or, at least, less marketable to the average buyer. If they don’t, then I’m afraid it’s a bit of a sunken cost. Still, it’s one that both Husband and Wife share if we’ve used a shared marital asset, like a retirement account.
It’s a bit messier, too, to mix in a separate interest – like an inheritance. We’d have to look at whether and how much the property increased in value to determine whether any of the proceeds from the inheritance could be traced back and then re-attributed to the Wife, especially in the event that she winds up being bought out of her interest in the home. Again, if the value of the home is not improved by the investment, I think it’s probably lost. If it has been improved, especially if it is a dollar-for-dollar improvement or better (meaning that we don’t have to look back to determine whether the inheritance or the retirement account contributions contributed to the increase in value of the home), then we’re probably in good shape.
What would happen to the home in divorce?
Usually, there are two options: either one party buys out the other, subject to agreement of the parties, or, alternatively, the home would be sold. It’s a little harder because the home was owned by Husband prior to the marriage. If he wants to keep it, I think he likely could, even if you litigated. If he were willing to agree, though, he could sell it to you – this probably would not represent a gift but a calculated buy out – but that would depend entirely on his willingness to agree.
This is a complicated issue because of all the unanswered questions, but it all comes down to when the asset was purchased and how it was paid for. As far as the improvements are concerned, it’s much more clear cut – and you are much more likely to recover your investment – if the modifications you made to make the home accessible actually increased its value. Usually, we assume that improvements – a kitchen here, a bathroom there, a pool, or whatever – DO add value, but when it comes to handicap accessibility, it’s much more difficult to know for certain.
You will probably want to work with an experienced realtor to get an idea of what the actual value of the home is with the improvements so you – and, by extension, your attorney – can get an accurate read on things.
For more information, to request a copy of our Virginia divorce book, or to learn more about how property is classified and divided in divorce, visit our website at hoflaw.com, register to attend an upcoming divorce seminar, or give us a call at 757-425-5200.