Does payment of a mortgage with joint funds change the proper classification of the house from husband’s separate property to marital property under Virginia’s equitable distribution scheme?
Husband bought a house in his sole name five months prior to his marriage. The husband and wife lived in the house for a year and then leased it for the rest of their marriage. The rental income was deposited into a special joint bank account exclusively for the rent. The rent was then transferred to another general joint bank account, into which husband’s pay was deposited and which was used to pay the couple’s marital debts. After eleven years of marriage, wife filed for a divorce. As part of the equitable distribution order, the Virginia divorce court judge classified the house as marital property because the bulk of the mortgage was paid with marital funds, even though it was purchased by husband prior to the marriage and titled in his name alone. The Virginia Circuit Court judge held that marital funds were commingled with the separate property and transmuted into marital property.
In the published opinion of Duva v. Duva, 685 S.E.2d 842 (Va. App. 2009), the Virginia Court of Appeals reversed and remanded, or sent the case back to the divorce court judge to correct this error.
The Court of Appeals first recognized the standard of review: that the divorce court’s classification of property as marital or separate is a factual finding, that will be reversed on appeal only if it is plainly wrong or without evidence to support it. The Court of Appeals then recognized the definitions of marital, separate and hybrid property: marital property is all property titled in the names of both property and all other property acquired by each party during the marriage which is not separate property, that is, property received during the marriage by bequest, devise, descent, survivorship or gift from someone other than the spouse. Property acquired during the marriage by either party until the parties separate is presumed to be marital property. Hybrid property is a mixture of marital and separate property.
The Court of Appeals stated the rule missed by the divorce court judge in Section 20-107.3(A)(3)(d):
“When marital and separate property are commingled by contributing one category of property to another, resulting in the loss of identity of the contributed property, the classification of the contributed property shall be transmuted to the category of the property receiving the contribution. However, to the extent the contributed property is retraceable by a preponderance of the evidence and was not a gift, such contributed property shall retain its original classification.”
Thus, in this case, the marital payments became separate property, unless wife was able to retrace those payments to preserve their classification as marital. The divorce court made an error of law by not considering the mortgage payments losing their classification as marital property when commingled with husband’s separate property, the house. The divorce court did not consider whether wife had met her burden in tracing the payments to preserve their classification. On appeal, wife claimed that the court should consider that the house was acquired during the marriage, not before the marriage, when the equity was realized. The Court of Appeals rejected wife’s contention and held that the date of taking title is the date of acquisition. One acquires property either as separate or marital; one cannot acquire property as hybrid. The concept of hybrid property is relevant only after the initial classification. The source of the funds rule is a vehicle to determine whether property has been transmuted into hybrid property, it does not determine the original classification.
You should consult with your Virginia divorce lawyer to discuss how your property might be classified in an equitable distribution proceeding.