How Will That Down Payment Be Treated in Your Virginia Divorce?
It is a common story. You get married. You and your new husband or wife buy a beautiful new home. Everything is grand.
But then everything, gradually, over time, becomes… less grand, downright miserable, in fact. You separate. You contemplate divorce. You visit an attorney.
The question arises: what happens to the money that you (or your spouse) used to make the down payment? What happens to that money when you divorce?
There is a general rule that applies to this scenario under Virginia law. Just as background, real estate, when purchased during the marriage, is, by default under Virginia law, marital property regardless of how the real estate is titled. That is, the real estate can be titled in both of your names or solely or in the name of one party. It makes no difference to the question of whether or not the property is marital. However, if one of the spouses made the down payment using funds that were earned before the marriage, then the property is actually classified as hybrid—as partly marital and as partly separate—and the spouse who made the down payment is recognized to have a separate property interest that is not subject to equitable distribution.
Now, you might ask, how do we value this separate interest? This is where things get more complicated. Under Virginia law, courts are not required to follow any one rule or formula in determining the value of the separate interest. However, judges commonly apply what is known as “the Brandenburg formula” to determine the percentage of the property that is separate. That formula is derived from the Kentucky divorce case Brandenburg v. Brandenburg, 617 S.W.2d 871 (Ky. Ct. App. 1981).
Under the Brandenburg formula, where there is a down payment made from separate property, followed by a series of mortgage payments made from marital funds, the formula for determining the separate and marital interests in the property is:
Separate interest = down payment/total contributions
Marital interest = mortgage paydown during marriage/total contributions
The “total contributions” — the denominator in each fraction– is the sum of the down payment and the amount of the mortgage paydown during the marriage. [This simple version of the Brandenburg formula assumes there are no other contributions toward the property, such as renovations.]
Example. Assume a couple buys a house with a $10,000 down payment coming entirely from the wife’s separate property (pre-marriage funds). They then live in the house for a few years, and during that time pay the mortgage down by $40,000 from marital funds. Under the Brandenburg formula, the wife’s separate interest is 20% ($10,000/$50,000), and the marital interest is 80% ($40,000/$50,000). The court (if it follows this formula) can thus divide only 80% of the equity in the property during the equitable distribution hearing. So, if the court decides to divide the marital share evenly between the parties, it would award 40% of total equity to the husband (half of the 80% marital share), and the remaining 60% of total equity to the wife (half of the 80% marital share, plus her 20% separate property share).
There are other methods of valuing the separate interest, including the formula applied in the 2006 Virginia case of Keeling v. Keeling (which determines the amount of the separate interest by dividing the separate contributions by the property’s purchase price), and the so-called “reasonable rate of return” formula that has been applied in at least one Virginia circuit court case. But the Brandenburg rule is most commonly applied in Virginia.
What does this mean in your case? There is a simplistic but helpful analysis that can be applied if we assume Brandenburg but ignore transaction costs such as the cost of selling or refinancing the property. If your property has appreciated and your spouse made the down payment, then you are better off offering to reimburse your spouse dollar for dollar on the amount of the down payment, rather than applying Brandenburg. Conversely, the spouse who made the down payment would benefit from insisting on receiving his or her separate share as determined by the Brandenburg formula. If your property has depreciated, then the analysis is reversed. The spouse making the down payment is better off being reimbursed dollar for dollar for the down payment, and the other spouse is better off applying Brandenburg.
At any rate, it is important to understand that these formulas are not applied mechanically, and your particular case might be much more complicated than the simple example given above. If you are facing a divorce in Virginia and have a marital home which might be considered hybrid property, you should consult with an experienced divorce attorney who understands the Brandenburg formula as it might apply to your case. The divorce attorneys at Livesay & Myers, P.C. have years of experience in representing individuals in cases involving equitable distribution and hybrid property classification in Northern Virginia. Contact us to schedule a consultation today.