Appreciation of Pre-marital Assets upon Divorce
If I own a house prior to my marriage, and it appreciates in value during my marriage, does my spouse have any rights to the appreciation? This is a common occurrence and an issue that has been litigated heavily over the years. Pursuant to Virginia Code Section 20-107.3, a house owned prior to marriage is a premarital asset, and “the increase in value of separate property during the marriage is separate property, unless marital property or the personal efforts of either party have contributed to such increases and then only to the extent of the increases in value attributable to such contributions. The personal efforts of either party must be significant and result in substantial appreciation of the separate property if any increase in value attributable thereto is to be considered marital property.”
The easier scenario is when the mortgage is paid down after the marriage with marital funds. If the property is a rental property and the mortgage is paid with the rental income, then the principal pay down is also a separate asset. But assuming that the non-owning spouse can prove, through mortgage statements and testimony, how much principal was paid down during the marriage with marital funds (such as employment income) then the amount of principal paid down is marital, unless the owning spouse can prove that the payments were a “gift”.
The much more difficult argument for the non-owning spouse is that “personal efforts” of either/both spouse increased the value of the house. Often the non-owning spouse argues that he/she did lots of repairs/improvements to the house. Whether the specific efforts rise to the level of “personal efforts” is up to the discretion of the trial judge. Usually, however, the non-owning spouse cannot prove how much the property increased in value due to the personal efforts. Further, unless the appreciation is “substantial”, the appreciation is not subject to division. A review of the case law shows that it is difficult to win the argument that separate property has increased in value due to the personal efforts of either/both spouses.
Remember that, even if the argument is successful, the entire asset is not considered marital property; rather, only the appreciation in value after the date of marriage is considered marital property.
I have used real estate as an example in this post, but this argument can apply to any asset, including a business.