In our December 16, 2016, blog entry we discussed the distinction between separate property and marital property. Marital property is subject to equitable (not necessarily equal) division. Divorcing parties are entitled to keep all their separate property.
Separate property can be converted into marital property during the marriage. Tennessee common (case) law recognizes two ways this can occur: commingling and transmutation. Commingling occurs when separate property becomes so mixed with marital property or the separate property of the other spouse that it can no longer be clearly divided. Transmutation occurs when separate property is treated like marital property, creating an inference there is an intent to provide a gift to the marital estate.
A recent case discusses the transmutation of separate rental property into marital property. Givens v. Givens (Tenn. Ct. App., Sept. 29, 2017). Givens involved the end of a 10-year marriage. The husband purchased a rental house four years before the marriage. During the marriage, he re-financed the property and paid off the mortgage. Wife’s name was not on the deed or any of the financing paperwork. Husband testified at the divorce trial that the house was worth about $5,500 more than what he originally paid for it.
Husband conceded at trial the rental house’s mortgage was partly paid off using marital income and marital income was also used for remodeling expenses and taxes and insurance. Wife also put sweat equity into the property by helping clean up between renters and doing some landscaping. The trial court ruled the rental house should be classified as separate property, but the Court of Appeals reversed this ruling and held it had been converted to marital property through transmutation. The case was sent back to the trial court to re-calculate the equitable division.
The longer the marriage and the more casual spouses are with their finances, the more difficult it may be to demarcate separate property in a divorce. A skilled divorce lawyer will know it’s sometimes necessary to go beyond a loan application, title, deed, etc., to determine whether a particular asset is subject to division. Spouses wishing to protect separate property brought into the marriage or acquired during the marriage would be well-advised to make their partner aware of their intentions and treat the asset accordingly.