Classifying Separate vs. Marital Real Property; Determining When Transmutation has Occurred

October 4, 2012
By The McKellar Law Firm, PLLC on October 4, 2012 5:10 PM |

In Sandford v. Sandford McKee, No. M2010-00562-COA-R3-CV (Tenn. Ct. App. Sept. 27, 2012), Tennessee divorce attorneys learn how courts decide which real property is classified as marital versus separate and how courts determine whether transmutation has occurred.

The facts: The parties obtained a divorce after eight years of marriage. The court adopted a parenting plan, provided Wife with transitional alimony, and equitably divided the property. At trial, it was established that Husband had bought (and had invested even more money in repairing) a 63-acre farm and house in Franklin, TN prior to the marriage. Also prior to the marriage, Husband had obtained a mortgage on the house and 10 acres of the farm ($1,050,000 fair market value) and kept the other 53 acres ($684,300 fair market value) separate. Situated on the 53 acres of land was a barn that Husband "convert[ed] into a guesthouse"; while Wife's father had contributed about a week of his time for framing the house and inspecting a lumber list, Husband had completed most of the work on his own prior to the marriage. Wife alleged that she had sanded, painted, decorated, furnished, designed, found assistants, and ordered wood for the new guesthouse. Husband obtained a $1,404,000 mortgage on the 10 acres and house in 2006; Husband obtained a $150,000 home equity loan in 2007, with security being the entire 63 acres (both Deeds of Trust were signed by both Husband and Wife).

At the conclusion of trial, the court held that the Franklin home on the 10 acres belonged to Husband as his separate property (however, any appreciation that occurred due to Wife's involvement during the marriage constituted marital property). Since the appreciation was equal to the mortgage indebtedness ($350,000), the court gave Husband this property to own and pay off. The trial court further held that the other 53 acres of the property belonged to Husband as "separate property as Wife made no substantial contribution to the appreciation of the value in that property." However, Wife alleged that transmutation occurred on both properties because she co-signed the 2006 and 2007 loan Deeds of Trust, enabling Husband to obtain a much higher loan than he otherwise could have and making her "an essential party."

The appellate court addressed whether the trial court's categorization of marital and separate real property was correct. Citing to Tenn. Code Ann. ยง 36-4-121, the court defined "marital property" as: "... all real and personal property, both tangible and intangible, acquired by either or both spouses during the course of the marriage up to the date of the final divorce hearing..." and "income from, and any increase in value during the marriage of, property determined to be separate property... if each party substantially contributed to its preservation and appreciation." The court defined "separate property" as: "all real and personal property owned by a spouse before marriage."

The appellate court further noted that "contributions [to separate property that convert it to marital property] may be either 'direct' or 'indirect'" but (1) "the contributions must be 'real and significant'" and (2) "there must be some link between the spouses' contributions and the appreciation in the value of the separate property."
In this particular case, the appellate court reaffirmed the trial court in ruling that the 53 acres should belong to Husband since it constituted "separate property." In support of this decision, the court first noted that Husband's evidence suggested depreciation of the 53 acres and that Wife never attempted to prove appreciation of the 53 acres. Secondly, the court asserted that Wife never actually showed that her personal "contributions [led to] any appreciation in value of the 53 acres," but that Wife simply claimed that she provided such contributions.

In response to Wife's transmutation argument, the appellate court again affirmed the trial court's ruling since Wife failed to meet her burden. Transmutation, which can be proved if "separate property [is put] in the names of both spouses" or if spouses "take title in joint tenancy," "occurs when separate property is treated in such a way as to give evidence of an intention that it become marital property." The court looks to "conduct between the parties" in determining whether transmutation has occurred. Here, Husband's actions never revealed that Husband "intended the house and 10 acres or the 53-acre parcel to become marital property." Wife only signed two Deeds of Trust "to protect the bank's interest in the property"; she never paid on either loan and never "signed either note [or] assumed liability for them." The appellate court also mentioned that the trial court required only Husband to pay debts related to both properties.