Community Interest
in a Separate Residence

A recent Arizona Court of Appeals case has addressed the situation when one spouse owns a residence before the marriage and the parties live in the residence during the marriage. At the time of the divorce, the non-owning spouse may make a claim to the residence.

If during the marriage, the parties changed the title to joint ownership, there is generally a presumption of a gift of the equity in the house by the owning spouse to the non-owning spouse. The presumption of the gift can be overcome, but it is very difficult to do so. If the property is refinanced during the marriage, and both names are put on the deed and the mortgage or loan, this also means that the non-owning spouse becomes an owner of the residence and is entitled to half of the equity in the residence at the time of a divorce.

However, even if the non-owing spouse’s name is not added to the Deed to the house, he or she may have an interest, known as a “community lien,” in the house at the time of a divorce. This arises when, during the marriage, the mortgage balance is decreased by payments made on the mortgage. The community is entitled to a lien in the amount of the reduction in the principal balance of the mortgage during the marriage. So if the mortgage decreases during the marriage by $10,000, the community is entitled to this reduction (increase in the equity of the residence).

The community may also be entitled to a part of the increase in value of the residence during the marriage. The case of Barnett v. Jedynak, 1 CA-CIV 07-0558 decided by the Court of Appeals on January 1, 2009, sets forth a formula, which multiplies the increase in value of the residence during the marriage by the ratio of the community contributions to the principal during the marriage to the purchase price of the residence.

Application of this decision requires that the residence be appraised as of the date of the marriage and the date of the filing of the divorce. The parties also need to know the amount of the payments by the community income to the principal of the mortgage. The community may also be able to argue a greater amount of the appreciation is community if the appreciation was due to the community paying for improvements to the residence.

The community lien may be eliminated if the parties have a valid pre-marital agreement that covers the house. A pre-marital agreement should specifically address the house and any payments to be made by the parties during the marriage and any increase in value during the marriage.

by: Sandra Tedlock