Appreciation of Real Estate: What Is “Substantial Contribution” in Tennessee Divorce Law?

Classification of Real Estate in Tennessee Divorce Law: Marital or Separate Property?

Appreciation of Real Estate in Tennessee: What Is a “Substantial Contribution”?

Appreciation of Real Estate in Tennessee: What Is a “Substantial Contribution”?

Appreciation of Real Estate: What Is a “Substantial Contribution”?

When two parties divorce in Tennessee, real estate acquired before the marriage is considered separate property.  The appreciation of separately owned real estate also remains separate property unless the non-owning spouse can prove to the court that the appreciation should be considered marital property.   To prove entitlement to a portion of the appreciation, the non-owning spouse must convince the court that he or she made a “substantial” or “real and significant” contribution to the appreciation of the property.  The non-owning spouse must also show a link between the spouse’s contribution to the property and the appreciation of the property.  Appreciation remains separate property when it is caused by outside sources other than either spouse’s contributions.   The three cases below explore what types of contributions are considered “substantial” enough for Tennessee courts to treat real estate appreciation as marital property.

In Denton v. Denton, 33 S.W.3d 229, 231 (Tenn. Ct. App. Dec.  2000), the parties purchased 37.6 acres of unimproved property for $16,000 one year after they married.   The couple constructed a log cabin and began a farming operation on the property.   Twelve years after the property was purchased, Mr. Denton executed a quit claim deed that conveyed his interest in the property to his wife.   After he executed the quit claim deed, Mr. Denton continued to make improvements to the property that substantially increased its value.  These improvements included the construction of a fence, an unattached garage, and a large storage building and shop.  Mr. Denton also installed electric fencing around the property, made a cattle corral, constructed culverts over the creeks, began building the foundation for a barn, and ran power and water to the new site.

When the parties divorced many years later, the trial court held that the value of the property at the time Mr. Denton executed the quit claim deed was Mrs. Denton’s separate property.   The trial court also held that the appreciation of the value of the property that occurred after the execution of the quit claim deed was Mrs. Denton’s separate property.  Mr. Denton appealed, arguing that he did not intend to convey his interest in the property to his wife as a gift.  In the alternative, Mr. Denton contended that the increase of the value of the property was marital property and should be divided between the parties.  The Tennessee Court of Appeals held that the property was a gift from Mr. Denton to Mrs. Denton, and therefore its value was not subject to division between the parties.  However, the court found that Mr. Denton’s substantial contributions to the property entitled him to part of the value of the appreciation.  Even though the appreciation of the property was also attributable to market forces, the court divided the $186,000 increase in the value of the property between the two parties to reflect Mr. Denton’s substantial contributions.

In contrast, consider Harrison v. Harrison, 912 S.W.2d 124 (Tenn. 1996),  Mr. Harrison and his brother each inherited a half interest in a 45 ½ acre tract of land that was used for farming. At the time Mr. Harrison married Mrs. Harrison, the value of the land was $7,000.  After an interstate was constructed across the tract of land, the value of the land increased substantially.  Portions of the tract were sold or leased to Days Inn, Shoney’s, Waffle House, and Exxon.  Mr. Harrison used the proceeds of the sales and leases of the tract to purchase a marital home which he and Mrs. Harrison owned together.

When the parties divorced, the tract of land was valued at $1,361,750.  Both parties admitted that the sole cause of the increase in the value of the land was the construction of the interstate.  In its division of property, the trial court held that the tract of land was marital property and awarded Mrs. Harrison $340,437.50 for half of the value of Mr. Harrison’s interest. The Tennessee Court of Appeals held that the property was not marital property, but nevertheless awarded the substantial appreciation of the property during the length of the marriage to Mrs. Harrison.  Mr. Harrison appealed the holding to the Tennessee Supreme Court and claimed that Mrs. Harrison was not entitled to the value of the appreciation of the land because the tract was separate property to which Mrs. Harrison made no substantial contribution. The Tennessee Supreme Court agreed with Mr. Harrison and held that the appreciation value of property is only considered marital property when a spouse substantially contributes to the preservation and appreciation of the property.  The drastic appreciation of the land was due solely to the construction of the interstate, so the Court held Mr. Harrison’s interest in the land to be separate property that was not subject to division with Mrs. Harrison.

Finally, consider Ballard v. Ballard, No. M2008-00713-COA-R3-CV, 2009 WL 152576 at *1 (Tenn. Ct. App. Jan. 21, 2009).  Before he met his future wife, Mr. Ballard purchased a home in his own name for $81,000.  The same year he began dating Mrs. Ballard, he paid off the first mortgage on his home in full and obtained a second mortgage.  After the parties married, Mr. Ballard paid the second mortgage, utilities, property taxes, and homeowner’s insurance from a personal checking account that he maintained separately from his wife.  While the parties were married, Mrs. Ballard and her child from another marriage caused two major fires in Mr. Ballard’s home.  The homeowner’s insurance obtained by Mr. Ballard covered the substantial repairs needed after both of the fires.  While Mrs. Ballard admitted to paying nothing towards the mortgage, she used income from child support and various part-time jobs to buy needed items for the family and “things for the house.”

When the parties divorced, the trial court held that the home was Mr. Ballard’s separate property.  The trial court also held that Mrs. Ballard was entitled to 40% of the $50,000 appreciation of the home from the date of the marriage until the date of the divorce decree.  The trial court, however, deducted money from Mrs. Ballard’s $20,000 award because she stole Mr. Ballard’s credit card to make unauthorized purchases and fraudulently forged checks on Mr. Ballard’s checking account.  The trial court took further deductions for repairs on the house made by Mr. Ballard after the couple separated.  Mrs. Ballard appealed the trial court’s decision, claiming that the holding was erroneous in its calculations of her equity in the marital residence and deductions for credit card charges and forged checks. The Tennessee Court of Appeals reversed the holding of the trial court and found that Mrs. Ballard made no significant contributions to the appreciation of Mr. Ballard’s home.  In a strongly worded opinion, the court noted that “[Mrs. Ballard’s] only ‘contributions’ were contributing to two fires at the home, causing approximately $200,000 in damage, and contributing to the home’s filthiness by bringing two pot-bellied pigs into the home.”  Accordingly, the court awarded Mr. Ballard the full value of the appreciation of the home.

For more information about “Appreciation of Separate Property” possibly becoming marital property, see:

Memphis divorce lawyer, Miles Mason, Sr., JD, CPA practices family law exclusively and is founder of the Miles Mason Family Law Group, PLC, in Memphis, Tennessee. He authored The Forensic Accounting Deskbook: A Practical Guide to Financial Investigation and Analysis for Family Lawyers, published by the American Bar Association.  Miles is past Chair of the Tennessee Bar Association Family Law Section and is a prolific author and public speaker on divorce trial practice presenting seminars to attorneys, forensic accountants, and business valuation experts.

Topics

Copyright © 2024 Miles Mason Family Law Group, PLC   - Disclaimer