When community money is used to improve or invest in the separate real property of one spouse, the community will have a constructive “lien” against that separate property in the divorce. What this means is that the community will likely be entitled to a reimbursement for monies invested in the separate property as well as a portion of the increase in value.
Community Liens During A Divorce
By way of example, if a spouse owns a home prior to marriage, but after marriage uses her earnings to pay the monthly mortgage payments, the community will be entitled to a constructive lien on the property. Let’s say that the wife purchases a house for $300,000.00 prior to marriage. She puts 10% down ($30,000.00) from her separate money and begins making mortgage payments.
The wife then marries the husband, and they use a joint bank account or Wife’s post-marriage income (now community property) to pay the mortgage. At the time of divorce, the mortgage has now been paid down by $50,000.00 during the marriage alone. This does not include the initial down payment or the reduction in mortgage prior to the marriage.
Additionally, the parties used $10,000.00 of community money to improve the kitchen. The total community principal investment is $90,000.00 (we don’t count interest paid on the mortgage in this calculation). The property is now worth $450,000.00 (an appreciation of $150,000.00).
The Arizona Court of Appeals established a formula to determine the community lien in Drahos v. Rens, 149 Ariz. 248, 717 P.2d 927 (App. 1985). Below is the calculation for this example.
C + [C/B x A]
A = appreciation since purchase
B = original purchase price
C = total community contribution
90,000 + [60,000/300,000 x 150,000] = 90,000
So the community lien on the property is $90,000.00, of which each spouse is entitled to one-half.
The same is true when the separate property is purchased during the marriage, but the other spouse signs a Disclaimer Deed. If the property is purchased with separate funds, but community money is used to pay down the mortgage each month, the community will have a lien similar to that in the above example.
Recouping Community Funds
There are also rules for recouping community funds spent on separate property even when that property is “underwater,” or has lost value over the course of the marriage. It is important for each spouse to understand their rights for community reimbursement and their rights in protecting their separate property in a divorce.