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Community Property Lien on a Depreciating Asset in Arizona

Calculating a Community Property Lien on a Depreciating Asset in Arizona.

We want to talk to you about calculating a community property lien on a depreciating asset in Arizona. Fortunately, the Arizona Court of Appeals dealt with that issue in the case of Valento v. Valento.

In its published decision in Valento v. Valento, 224 Ariz. 477, 240 P.3d 1239 (App. 2010), the Arizona Court of Appeals examined, as an issue of first impression, to what extent a marital community can claim an equitable lien against a spouse’s sole and separate property when community funds have contributed to the equity in the property and declining market conditions have reduced the property’s overall value.

Husband and Wife married in 1999 and acquired multiple properties during their marriage.  The husband signed a disclaimer deed that recognized one of the properties (“27th Place”) as Wife’s sole and separate property.  The wife filed for dissolution in September of 2008.

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Community Funds Used to Pay the Mortgage on Separate Property

Both parties characterized the purchase of the 27th Place property differently.  The wife testified that she purchased the property for $1.2 million in 2005, comprised of a $560,000 down payment from her separate funds and a mortgage of $650,000.  During the marriage, the parties paid down the principal balance on the mortgage by $200,000.  The outstanding mortgage balance at the time of trial was approximately $400,000.

The husband testified that the property was purchased for $384,000 as a vacant lot subject to the disclaimer deed, but community funds were used to build the home and improve the property.

The parties also disagreed on the value of the property.  The husband submitted a year-old appraisal that valued the property at $1.65 million but conceded that by the time of trial, the real estate market had declined approximately 30% in value.

The husband’s proposed valuation was the appraisal amount plus the value of subsequent improvements, less 30%, resulting in a value of $1,225,000 (approximately $15,000 more than the combined value of the mortgage and down payment).  The wife proposed valuation of $880,000 at the time of trial based on comparable properties.

The trial court found that the property was Wife’s sole and separate property but did not make a finding regarding the property’s value.  Rather, it concluded that there was a community lien based upon the reduction of principal from the contribution of community funds. 

Therefore, the trial court determined that an equitable lien of $200,000 attached to the 27th Place property.  Husband appealed from the court’s determination of the value of the lien against the 27th Place property and Wife cross-appealed arguing that no equitable lien existed against the 27th Place property.

Arizona Community Liens in a Decreasing Real Estate Market

Calculating a Community Lien on Depreciating Real Estate in Arizona.

On appeal, Wife argued there should be no equitable lien because the property declined in value during the marriage.  The Court of Appeals disagreed and looked to its prior decision in Barnett v. Jedynak, 219 Ariz. 550, 200 P.3d 1047 (App. 2009), where it prescribed a formula for valuing the lien of property that appreciates during the marriage:  C + [C/B x A]; where A = appreciation in value of the property during the marriage, B = value on the date of marriage, and C = community contributions to principal.

Using its logic from Barnett, the Court of Appeals concluded that when equity is negative, the community lien can be valued as follows:  C – [C/B x D]; where D = deprecation in value of the property during marriage, B = value on the date of marriage, and C = community contributions to principal or market value.

Applying the formula to the facts of the case, the Court of Appeals found that when Wife purchased the property, she obtained a mortgage of $650,000, during the marriage, the parties used at least $200,000 of community funds to reduce the mortgage principal, and that at the time of trial, the outstanding loan balance was $400,000.

Whether the value of the property appreciated or depreciated during the marriage, the Wife’s equity position in the property was enhanced to the extent of the decrease in the loan balance.  The case was remanded for further proceedings to make a determination of the value of the property at the time of trial and to value the community lien in a manner consistent with its ruling.

If you have questions about community property lien on a depreciating asset in Arizona, you should seriously consider contacting the attorneys at Hildebrand Law, PC. Our Arizona community property and family law attorneys have over 100 years of combined experience successfully representing clients in community property and family law cases.

Our family law firm has earned numerous awards such as US News and World Reports Best Arizona Family Law Firm, US News and World Report Best Divorce Attorneys, “Best of the Valley” by Arizona Foothills readers, and “Best Arizona Divorce Law Firms” by North Scottsdale Magazine.

Call us today at (480)305-8300 or reach out to us through our appointment scheduling form to schedule your personalized consultation and turn your community property or family law case around today.