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What is a separate property credit?
November 6, 2019

What is a separate property credit?

In a New York diovrce case, when a home is purchased with funds acquired prior to the marriage and you put both names on the deed, you may still be entitled to a separate property credit against the sale proceeds of the marital real property if you can trace the source of the fund back to a separate property asset, and if you have not comingled marital funds or marital earnings into that account.

This is because commingled funds, verses mere title transmutation into joint names,  are precepts that are dealt with differently  in their entirety,  under all the case law.  Contrary to merely changing title to the property, the commingling of funds almost always defeats a separate property characterization as well as a separate property credit. 

This is a well settled concept of divorce  law in New York.  The Court must first classify the property at issue as marital verses separate. They next distribute it via equitable distribution at trial.

As to any marital asset acquired with one of the parties' separate funds, even if the asset is classified as marital by the court it is not always distributed equally.  In point of fact, it  is pretty settled law that the person contributing their separate property receives a dollar for dollar credit for any separate property fund.  (see e.g. Juhasz, 59 A.D.3d at 1024, 873 N.Y.S.2d 799; Murphy, 4 A.D.3d at 461, 772 N.Y.S.2d 355; **1044 ***788 Judson, 255 A.D.2d at 657, 679 N.Y.S.2d 465; Heine,176 A.D.2d at 84, 580 N.Y.S.2d 231).. “In these situations, courts have usually given the spouse who made the separate property contribution a credit for such payment before determining how to equitably distribute the remaining value of the asset …”(see e.g. *168 Zurner v. Zurner, 213 A.D.2d 906, 908, 624 N.Y.S.2d 301 [3d Dept.1995]lv. denied 87 N.Y.2d 802, 638 N.Y.S.2d 425, 661 N.E.2d 999 [1995]; Burns v. Burns, 193 A.D.2d 1104, 1106, 598 N.Y.S.2d 888 [4th Dept.1993]mod. on other grounds 84 N.Y.2d 369, 618 N.Y.S.2d 761, 643 N.E.2d 80 [1994] ).

Next, in distributing the appreciation in value of the real estate a court may consider any of the several isted factors enumerated in Domestic Relations Law § 236(B)(5)(d) or any other factor that is equitable in their estimation.  (see e.g. Butler v. Butler, 171 A.D.2d 89, 93–94, 574 N.Y.S.2d 387 [2d Dept.1991]Woodson v. Woodson, 178 A.D.2d 642, 642–643, 578 N.Y.S.2d 217 [2d Dept.1991] ), including each of the parties’ indirect efforts and contributions as well as any passive increase in the market value.

For example, in the first department case of Heine v Heine 176 A.D.2d 77  the Appellate Division credited the husband with the amount of the down payment, classifying it as the Husbands separate property and left only the appreciation in value subject to determination as to equitable distribution at trial.

In the first Department case of Klauer, the court there, the parties sold a marital property and then commingled the sale proceeds of that marital real property with plaintiff’s separate 325K trust fund (big mistake)  and the parties next bought a second piece of marital property out of that commingled fund. There, the court also expressed that Plaintiff’s separate trust fund, which was formerly separate, lost its separate property character when it was commingled with the parties  marital real property sale proceeds. Those parties next bought a second property with these mixed, transmuted, commingled funds so the court properly held that the second purchase was marital.     In other words, the court did not award a separate property credit because of the commingled nature of the source of the down payment,  and for no other reason.  The court concluded, in its support of its decision, and held, that the property was marital not subject to a credit since Plaintiff failed to rebut  the presumption of marital property where the source of the down payment was derived from comingled funds.

But even if there was comingling, the court still recognized the plaintiff’s extraordinary monetary separate contributions of Plaintiff in its distributive award, awarding her 70 percent of the sale proceeds, anyway, this despite the fact that the separate property credit was formally obliterated by the commingling.

By Your Manhattan Divorce Lawyer

Lisa Beth Older

And also see citations referring to case law.