Community Liens Valuation In A Divorce

Community Liens can be a complicated and confusing term and can be a difficult concept in your divorce. Unless you were married at a very young age, you and your spouse probably each came into the marriage with some property.

Is it your property or your spouse’s? Or is it shared?

Generally speaking, the property you acquired before the marriage is your sole and separate property. However, if the value of your sole and separate property increased during the marriage, or the community made contributions towards maintaining/improving the property during the marriage, your spouse may have what’s called a community lien on your property.

Community liens most come up with respect to real property (e.g. marital residence) and business, but the principle may be applied to any asset for which the community has made contributions. Community liens are complex issues that require the assistance of an attorney to resolve. If you believe there may a community lien issue in your case, below is a brief list of questions to help you understand how they work.

Question 1: What are the key factors to determine the value of a community?

Answer: Every community lien calculation is based upon three key values: (1) the starting value; (2) the change in value during the marriage (positive or negative); and (3) community contributions during the marriage.

Question 2:   What constitutes a community contribution?

Answer: Most contributions made during the marriage are going to qualify as a community contribution because generally speaking, income earned by either party during the marriage is community income. One potential exception would be if the contributions came entirely from a separate asset owned by the spouse that owns the separate property. However, the funds flowing from the separate asset to the separate property in question would have to be traceable.

For example, if the spouse that owned the home prior to the marriage paid the mortgage during the marriage entirely from a bank account he/she owned prior to the marriage, there would be no community contribution. However, such a scenario is extremely rare. Most of the time, the mortgage is paid using a joint or community bank account.  Finally, it is important to remember that the Court will only consider the contributions that paid down the principal on the loan associated with the asset. In other words, you can disregard the community funds that were paid towards the interest on the loan

Question 3:   What constitutes the starting value of the separate property?

Answer: The starting value is either determined using the purchase price of the property, or the value of the property on the date of marriage. Generally speaking, using purchase price as the starting value usually favors the community lien holder, whereas using the value on the date of marriage typically favors the separate property owner. Case law exists supporting both arguments, but more often than not, the Court will use the value on the date of marriage as the starting value.

Question 4: Can a community lien exist when the property has depreciated in value during the marriage?

Answer: Yes. It is a common misconception that community liens only exist if there has been appreciation or an increased in equity. However, the law provides for a community lien even if there has been depreciation or a decrease in negative equity. The only thing that changes is the formula that is used to calculate the amount of the lien.

Question 5: How does the Court determine the amount of appreciation or depreciation in value?

Answer: Appreciation or Depreciation during the marriage is calculated as follows:

Value on the Date of Marriage – Value on the Date of Termination (usually date of service)

For example, if the value of the home on the date of marriage was $100,000 and the value on the home on the date of service (termination) was $300,000, then the appreciation in value would equal $200,000. Conversely, if the value of the home on the date of marriage was $300,000 and the value of the home on the date of service (termination) was $200,000 the depreciation would be $100,000.

As a practical note, determining the amount of appreciation or depreciation almost always requires two (2) appraisals. One retroactive appraisal for the date of marriage, and one appraisal for the date of service (termination).

Question 6: How does the Court calculate the community lien when the property has appreciated in value.

Answer: When the value of a separate asset, for example real estate, appreciates (goes up) in value during the marriage, the Court uses the following formula to calculate the value of the community lien:

Community Contributions to Principal Reduction + ((Community Contributions to Principal Reduction/Starting Value) X Appreciation)

Thus, the main question is whether to use the purchase price or the value on the date of marriage as the starting value. See answer to Question #10.

For example, assuming the following:

Starting Value = $100,000;

Appreciation   = $200,000;

Community Contributions = $25,000;

The Community liens equals:

$25,000 + ($25,000/$100,000) X $200,000;

$25,000 + (.25 X $200,000)

$25,000 + $50,000

$75,000

Question 7: How does the Court calculate the community lien when the property depreciates in value?

Answer: When the value of a separate asset, for example real estate, depreciates (goes down) in value during the marriage, the Court uses the following formula to calculate the value of the community lien:

Community Contributions to Principal Reduction – (Community Contributions to Principal Reduction/Starting Value) X Depreciation)

Similar to the previous question, the main variable here is whether to use the purchase price or the value on the date of marriage as the starting value. See answer to Question #10.

For example, assuming the following:

Starting Value = $300,000;

Depreciation   = $100,000;

Community Contributions = $50,000;

The Community liens equals:

$50,000 – ($50,000/$300,000) X $100,000;

$50,000 – (.1667 X $100,000)

$50,0000 – $16,666.67

$33,333.33