Marital Appreciation of Nonmarital Real Property – Kaaa revisited
On March 21, 2018, the Florida Governor approved an amendment to Florida law, under which passive appreciation of nonmarital property during the marriage may be equitably distributed. See Kaaa v. Kaaa, 58 So.3d 867, 868 (Fla. 2010). Laws of Florida 2018-56, amends section 61.075(6) supplements the definition of “marital assets and liabilities.”
Marrying couples may consider providing in a premarital agreement for allocating fairly the passive appreciation and active appreciation in separate property during the marriage if they divorce.
While developing options for achieving parties’ financial interests in Florida divorce cases, divorcing couples and their collaborative teams should consider Florida law on identifying and allocating the marital component of passive appreciation in nonmarital property.
“Passive appreciation” means growth in value inflation or market forces cause. “Active appreciation” means growth in value either spouse causes, such as by paying down mortgage principal, adding a wing, or renovating a carport or bathroom.
Under Kaaa, there was no relationship between marital funds used to pay the mortgage principal during the marriage and the passive appreciation of the nonmarital property. Further, if the nonowner spouse did not pay down the mortgage or contribute to the enhancement of value in the property, the nonowner would be entitled to no passive appreciation. Applying Kaaa led to some unfair results, for example, when the nonowner paid nothing to reduce the mortgage principal on the nonmarital property during the marriage, but the owner used income earned during the marriage to pay down the mortgage principal.
In late-2011, the Florida Bar Family Law Section, led by David L. Manz, proposed a fix to glitches in the Kaaa approach. See, Manz, David L., The Marital Share of Passive Appreciation of Nonmarital Property: Deconstructing Kaaa for a Better Solution, February 2013, Volume 87, No. 2 and CS/SB 752, Various Staff Analyses, Senate, State of Florida, Judiciary, Banking and Insurance, and Budget Subcommittees (2012); Fla. H. 565, 2012 Reg. Sess. (November 3, 2011); CS/SB 0752, 2012 Reg. Sess. (October 28, 2011) (Tabled 3/9/2012); Substituted CS/CS/HB 565 (died on calendar in Senate).
With no legislative fix having passed, Florida courts applied Kaaa as binding. See, for example:
- Hodge v. Hodge, 227 So. 3d 1284 (Fla. 5th DCA 2017) (finding the trial court erred in applying Kaaa’s five-step analysis to calculate Former Husband’s nonmarital portion of appreciation of property).
- Viscito v. Viscito, 214 So. 3d 736, 738-39 (Fla. 3d DCA 2017) (rejecting Former Husband’s argument he should be awarded a higher amount of passive appreciation in Former Wife’s nonmarital condominium, equaling half the net fair market value of the condominium, plus half the passive, market-driven appreciation on the Former Wife’s non-marital interest, plus certain mortgage payments from marital funds that allegedly reduced the mortgage debt on the non-marital interest in the condominium. The Former Husband’s computation failed to account for increases in the mortgage debt his gambling losses and unemployment caused and did not follow the Kaaa approach, which adjusted the allocation by accounting for the loan-to-value ratio of the nonmarital property at the time of the marriage).
- Harris v. Harris, 205 So. 3d 873, 875 (Fla. 5th DCA 2016) (holding the trial court failed to consider correctly the marital portion of the appreciation of Former Wife’s house, where the parties used marital funds to pay a few mortgage payments and to improve the house, including a new roof, an air conditioning system, new kitchen appliances, and a remodel of the garage).
- Somasca v. Somasca, 171 So. 3d 780, 783 (Fla. 2d DCA 2015) (finding the trial court failed to treat as a marital asset the increase in equity from using marital assets to reduce the mortgage on nonmarital property).
In 2018, the Florida Legislature fixed Kaaa’s shortcomings. Effective July 1, 2018, section 61.075, Florida Statutes includes as a marital asset passive appreciation in nonmarital property only one spouse owns, if marital funds are used to pay down the mortgage principal.
The amended statute provides an equation for calculating the marital share of passive appreciation in the nonmarital property. Contributions towards the nonmarital property during the marriage and income either spouse earns during the marriage increasing the value of the nonmarital property are marital. The amendment eliminates Kaaa’s condition that, to share in passive appreciation of nonmarital property during the marriage, the nonowner spouse must contribute actively to the appreciation.
Applicability to Cases Filed After Effective Date
For dissolution of marriage cases filed before July 1, 2018, the Kaaa formula applies. But for cases filed on or after July 1, 2018, the new formula applies. See Matyjaszek v. Matyjaszek, 255 So. 3d 372 (Fla. 4th DCA 2018) (applied Kaaa; the 2014 version of 61.075(6)(a) applied because it was the version in effect when the wife filed the dissolution petition). See also Busby v. Busby, 671 So. 2d 162, 163 (Fla. 4th DCA 1996) (finding the applicable version of the equitable distribution statute is the one in effect when the petition for dissolution was filed).
Three Steps for Determining Marital Passive Appreciation under the New Formula
The 2018 amendment establishes three steps for determining the marital passive appreciation in nonmarital property:
Step 1: Amount of passive appreciation that is marital:
- Get the value of the property on the valuation date in the dissolution action. That date may be one the parties agree upon, the date of filing a petition for dissolution of marriage, or one the court establishes based on equities, for example the date of separation or date of trial.
- Subtract the value of the property on the date of the marriage or, if later, date the owner spouse acquired the property.
- Subtract “active appreciation,” which is any enhancement in value resulting from the efforts of either party during the marriage or from the contribution to or expenditure thereon of marital funds or other forms of marital assets, or both.
- Subtract any additional encumbrances secured by the property during the marriage over the first note and mortgage on which principal is paid from marital funds.
Step 2: Percentage of passive appreciation that is marital:
- Get the total payment of principal from marital funds of all notes and mortgages secured by the property during the marriage. This is the numerator.
- Get the value of the property on the later of (1) the date of the marriage, (2) the date of acquisition of the property, or (3) the date the property was encumbered by the first note and mortgage on which principal was paid from marital funds. This is the denominator.
- Divide the numerator in step 2 A by the denominator in step 2B. To get the percentage, multiply by 100.
Step 3: Amount of marital passive appreciation:
Multiply the amount in Step 1 by the percentage in Step 2.
The total marital portion is (1) the amount in Step 3 (the marital portion of the passive appreciation), plus (2) the mortgage principal paid during the marriage from marital funds, plus (3) any active appreciation of the property. This total marital portion of the property is capped at the total net equity in the property at the date of valuation.
Adjustments for Fairness
The collaborative practice team may find guidance in the new formula. The amendment allows the court discretion to find evidence that applying the formula would be inequitable and the court should depart from it. Likewise, during the collaborative process, the parties may use the calculation as starting guidance, but exercise their rights as contracting parties to depart from that guidance if that’s fair.
The new statute, as with the prior Kaaa formula, doesn’t appear to address negative equity. Two 2018 cases illustrate the collaborative team might need to adjust to the formula for a fair result:
- No passive appreciation, but, during the marriage, the value of the property at the time of the agreed valuation date is less than the value when the parties got married, yet marital funds paying the mortgage on the nonmarital property enhanced the nonowner’s equity. In Frederick v. Frederick, 257 So. 3d 1105 (Fla. 2d DCA September 14, 2018), the nonowner spouse was entitled to a credit for paydown on mortgage on the nonmarital property, because that paydown increased the value of the equity. Thus, the marital portion to be divided was the marital paydown of principal.
- The property starts with a negative equity at the beginning of the marriage, and using a debt-to-equity ratio of more than 100% would lead to an absurd result. In Matyjaszek v Matyjaszek, 255 So.3d 372 (Fla. 4th DCA September 12, 2018), the court allocated 100% of the passive appreciation as a marital asset.
Text of Amended 61.075(6), Florida Statutes:
61.075 Equitable distribution of marital assets and liabilities.—
(6) As used in this section:
(a)1. “Marital assets and liabilities” include:
a. Assets acquired and liabilities incurred during the marriage, individually by either spouse or jointly by them.
b. The enhancement in value and appreciation of nonmarital assets resulting either from the efforts of either party during the marriage or from the contribution to or expenditure thereon of marital funds or other forms of marital assets, or both.
c. The paydown of principal of a note and mortgage secured by nonmarital real property and a portion of any passive appreciation in the property, if the note and mortgage secured by the property are paid down from marital funds during the marriage. The portion of passive appreciation in the property characterized as marital and subject to equitable distribution is determined by multiplying a coverture fraction by the passive appreciation in the property during the marriage.
(I) The passive appreciation is determined by subtracting the value of the property on the date of the marriage or the date of acquisition of the property, whichever is later, from the value of the property on the valuation date in the dissolution action, less any active appreciation of the property during the marriage as described in sub-subparagraph b., and less any additional encumbrances secured by the property during the marriage in excess of the first note and mortgage on which principal is paid from marital funds.
(II) The coverture fraction must consist of a numerator, defined as the total payment of principal from marital funds of all notes and mortgages secured by the property during the marriage, and a denominator, defined as the value of the subject real property on the date of the marriage, the date of acquisition of the property, or the date the property was encumbered by the first note and mortgage on which principal was paid from marital funds, whichever is later.
(III) The passive appreciation must be multiplied by the coverture fraction to determine the marital portion of the passive appreciation of the property.
(IV) The total marital portion of the property consists of the marital portion of the passive appreciation, the mortgage principal paid during the marriage from marital funds, and any active appreciation of the property as described in sub subparagraph b., not to exceed the total net equity in the property at the date of valuation.
(V) The court shall apply the formula specified in this subparagraph unless a party shows circumstances sufficient to establish that application of the formula would be inequitable under the facts presented.
d.c. Interspousal gifts during the marriage.
e.d. All vested and nonvested benefits, rights, and funds accrued during the marriage in retirement, pension, profit sharing, annuity, deferred compensation, and insurance plans and programs.
2. All real property held by the parties as tenants by the entireties, whether acquired prior to or during the marriage, shall be presumed to be a marital asset. If, in any case, a
party makes a claim to the contrary, the burden of proof shall be on the party asserting the claim that the subject property, or some portion thereof, is nonmarital.
3. All personal property titled jointly by the parties as tenants by the entireties, whether acquired prior to or during the marriage, shall be presumed to be a marital asset. In the event a party makes a claim to the contrary, the burden of proof shall be on the party asserting the claim that the subject property, or some portion thereof, is nonmarital.
4. The burden of proof to overcome the gift presumption shall be by clear and convincing evidence.
(10)(a) To do equity between the parties, the court may, in lieu of or to supplement, facilitate, or effectuate the equitable division of marital assets and liabilities, order a monetary payment in a lump sum or in installments paid over a fixed period of time.
(b) If installment payments are ordered, the court may require security and a reasonable rate of interest or may otherwise recognize the time value of the money to be paid in the judgment or order.
(c) This subsection does not preclude the application of chapter 55 to any subsequent default.
Legislative History of Amended Statute
HB 639: Equitable Distribution of Marital Assets and Liabilities
GENERAL BILL by Perez
Equitable Distribution of Marital Assets and Liabilities; Redefines “marital assets & liabilities” for purposes of equitable distribution in dissolution of marriage actions; provides formulas & guidelines for determining amount of passive appreciation; authorizes court to require security & interest when installment payments are ordered in division of assets.
Effective Date: 7/1/2018
Last Action: 3/21/2018 – Approved by the Governor.
See February 1, 2018 Analysis of Judiciary Committee: here.
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