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.
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:
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:
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.