How Much House is Really Yours? Non‐Marital and Marital Home Equity in Divorce

Concerns over equity have historically been discussed in divorce proceedings ‐ but often from a high‐level view with reliance on loosely assembled information. While practical in decades past, I am witnessing a shift and demand for tighter, supplemental micro‐level analysis as home values and equity continue to sharply rise.

Determining equity claims was once easy; twenty percent down, eighty percent financing and a house was paid off in thirty years. Armed with an original HUD closing statement, professionals could sort through records for verification of source of funds for purchase. By applying a standard growth‐averaging methodology they could then determine actual marital/non‐marital equity and value of a home at specific dates throughout marriage. However, introduction of intricate mortgage programs, refinancing instruments, home equity lines and cash outs, capital improvements, foreclosure, and short sales have rendered aforementioned methodology ineffective. Where does one obtain housing documents? How does marital/non‐marital equity change over time? What am ‘I’ entitled to? A forensic accountant can provide clear and defined answers to these questions.

Equity Tracing Engagements; Ask the Right Questions First

Parties utilizing forensic services must understand breaking down asset value to marital and separate components is both time and fee consuming. Often, information not known to one or both parties is uncovered which may require additional, unexpected analysis to complete an equity tracing project. It is imperative those considering and/or engaging forensic services discuss, at a minimum, the following:

1. What is the goal of analyzing home equity? To understand how an asset came to exist? To make a separate monetary claim against the asset? To make a claim an asset is fully marital? To identify where funds originated? To receive a range of value or trace down to the dollars?
2. Are all records available or existent to assist? – Are records and/or documents readily or easily obtainable? If not, what are the likelihoods of obtaining? If unable to obtain, what other information is available? Are spouses able to provide and/or reach agreement on assumptions made when information does not exist?
3. Forensic tracing engagements are not always ‘absolute’. Engagements may provide a range of reasonable values when specific information is not possible to unravel, not available, or limited to time
4. What is the other spouse’s reaction and opinion to the claim? On numerous occasions, I have seen spouses engage experts without considering and/or first discussing each‐others concerns (even in non‐collaborative divorce cases). The other spouse may be in agreement with the claim or determine it is not of interest to Simply asking can save substantial time, money, and sanity.
5. Cost‐benefit of asset claim. Fees in determining equity claims may quickly outweigh the claim A consultation with a forensic expert can provide foresight prior to undergoing engagement.

Complexities Affecting Home Equity Claims

While electronic record keeping continues improving amongst financial institutions, obtaining historic records are not without their complications (an expert can assist in retrieval). As information is retrieved an understanding of component linkage and flow of money must be examined. Let us walk through a brief example to show overlooked areas of home equity discussion and negotiations.

A primary residence is purchased 15 years ago, three years after marriage, for $500,000 with 20% cash at closing (from a joint brokerage account). Five years after purchase the home is refinanced and seven years after purchase a multitude of improvements were made. Currently one spouse believes the value is ~$1,100,000. There is a remaining mortgage of $100,000.

At face value, there exists $1,000,000 in marital equity. The assumption may be reasonable in certain circumstances but ignores several ‘caution’ flags:

• On purchase:
  • Was non‐marital cash utilized at closing? If so, how much? Was it from inheritance, a non‐marital business, or other asset?
  • Were points or real estate taxes also paid at closing? What were source of funds?
  • Were pre‐purchase inspections completed? What were source of funds?
  • Did the sellers contribute cash at closing? How should this be allocated between marital/non‐marital?
• During refinance and home equity lines:
  • Were funds pulled out in addition to the refinanced mortgage balance? If so, what were they used for (and subsequently, what is the composure of those funds)? Added complexities can arise if funds were used to purchase other property/ies.
  • What were home equity line funds used for? Were costs paid to obtain?
• Improvements:
  • How were improvements paid for? What was composure of funds utilized?
  • How much value did improvements add to house at the time of addition? How much do they add to overall current value?
• Mortgage:
  • How was the mortgage paid? Joint funds, separate funds, or commingled funds?
• Home Value:
  • How was/is value determined? Is an appraisal or comparative market analysis required?
  • If sold, will marital or non‐marital funds be used?
• Other factors:
  • Were commingled funds utilized in any factors mentioned above? Separate discussion and tracing analysis may be required to determine their non‐marital/marital composure and subsequent effect upon introduction to home

As items affecting buildup or reduction of equity ensue (ex. mortgage payments from martial funds or cash out of refinance) marital/non‐marital components of equity continue shifting ‐ becoming more multifaceted. Forensic experts will first obtain and review documents such as HUD purchase/refinance statements, bank statements indicating fund transfers, improvement receipts, property tax assessments, prior appraisals/market analysis, mortgage statements, and more. Subsequently, experts will trace funds and value increases by applying techniques such as relative‐weighting; computing weighted marital/non‐marital ratios on inception and adjusting for factors influencing asset composure. In the above example, $1,000,000 marital equity might only be $500,000.

Note that separate funds introduced to an asset closer to inception are more volatile with potential to cause greater dilution (and in some cases accretion) on long‐term marital value. With proper documentation, record keeping, and assistance of forensic experts non‐marital and marital equity claims can be substantiated.

Presenting a persuasive property case depends on clear‐cut analysis, and expert testimony. While no one divorce case is a like ‐ the utilization of a forensic accountant’s can provide value which outweighs the cost of services.

Jordan Egert, CPA, CFE, CDFA is the Manager of Litigation Support at Councilor, Buchanan, & Mitchell (CBM), where his time is devoted to financial consulting engagements (involving collaborative and litigated financial cases), forensic tracing engagements, and taxation as it relates to family law. Jordan Egert is a member of the Association of Certified Fraud Examiners, Maryland Association of Certified Public Accountants, and the Institute of Divorce Financial Analysts. For additional information or questions please contact Jordan via our contact form.

Councilor, Buchanan & Mitchell (CBM) is a professional services firm delivering tax, accounting and business advisory expertise throughout the Mid-Atlantic region from offices in Bethesda, MD and Washington, DC.   

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