Following up from the last post, I’ll address the common questions I hear from people who have signed a disclaimer or quitclaim deed to a house. Even though the spouse who disclaimed his/her interest in a house does not have a community interest in the house, he/she can still have an interest in the house in the form of a community lien. Again, in Arizona, property is characterized as either community or separate. A house is one spouse’s separate property when they own it prior to marriage, or when the other spouse signs a disclaimer deed at or after the purchase.
When community funds are used to contribute to the separate house of one spouse (such as paying the mortgage) the character of the house does not change. In other words, the house still remains the separate property of the spouse. However, the marital community is entitled to a type of equitable lien that allows the community to be reimbursed for some of the contributions (payments on the mortgage). The question then becomes how much the community should be reimbursed. Arizona case law dictates that the community is not reimbursed the exact amount spent towards the separate house. Instead, a value-at-dissolution formula is used which takes into account the enhanced value of the house and the amount of community funds spent on the mortgage. In the Drahos case, the Arizona court of appeals adopted a formula from California case law to apply to this type of scenario to determine the community reimbursement.
That formula is: The separate property interest is determined by adding the down payment to the product of the down payment plus principal payments made with separate property divided by the purchase price times the appreciation in value. The community property equitable lien interest is determined by adding the principal balance paid by the community to the product of the community property principal payments divided by the purchase price times the appreciation in value.
Confused yet? Don’t worry.
Simply put, the purpose of the formula is to reimburse the community proportionately to the community’s contributions to the separate house. Some key things to take away from this is that the formula only provides for reimbursement for contributions to principal, not interest. As you probably know, mortgage payments at first are mostly interest and reduce very little principal on the loan. This means that in most cases the reimbursement to the community will grow much larger over time as more payments are made and as those payments are increasingly applied to principal. Another take away is that the community will not benefit from all of the increases in value of the house due to an increasing market. Nor will the community necessarily receive dollar for dollar reimbursement for improvements made to the house, such as redoing the kitchen.
Perhaps the most important thing to think about is that the reimbursement is to the marital community, not the non-owner spouse. What does this mean? It means that the community–both parties–gets reimbursed for contributions of which the non-owner spouse will only get half. So, for example, if the community should be reimbursed $10,000.00 for contributions to principal during the marriage, then the non-owner spouse only gets $5,000.00 while the owner spouse gets to keep the house.
The overall point is that a spouse who signs a disclaimer deed (or used community funds to pay on the other spouse’s separate property owned prior to marriage) can obtain some equitable relief in divorce and there is a formula for reimbursement. There is plenty of discovery that needs to be conducted to prove the extent of a community lien. If you find yourself in a situation where you signed a disclaimer deed or paid on your spouse’s separate property during the marriage, you should consult with an Arizona divorce lawyer for advice and get an idea as to where you stand when it comes time to divide property.
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