A.     INTRODUCTION

    Many family attorneys in Maryland do not know how to calculate a client’s pre-marital interest in an individually titled home as part of a divorce.  This article explains the proper method of calculating a spouse’s pre-marital interest of an individually titled home bought before or during marriage in Maryland.

   B.  SOURCE OF FUNDS METHOD TO CALCULATE MARITAL AND NON-MARITAL VALUE OF PROPERTY

Except for real property held by tenants by the entireties, Maryland courts apply the source of funds method (or tracing) to characterize property acquired with non-marital and marital property expenditures.  Harper v. Harper, 294 Md. 54, 80 (1982).  Under the source of funds theory, “[i]f an encumbrance upon non-marital property is reduced by the expenditure of marital funds, the property becomes marital property to the extent of that marital contribution”.  Bang v. Bang, 59 Md.App. 350, 364 (1984).

In Grant v. Zich, 300 Md. 256, 276 at n. 9 (1984), the Supreme Court of Maryland provided the following example of the proper method for calculating the marital and non-marital interests in a home purchased with non-marital and marital funds.

A married couple purchased real estate for a total of $40,000. The wife provided a down payment of $10,000, which came from an asset she owned before their marriage. The couple financed the remaining $30,000 through a mortgage that was signed by both the husband and wife. One-fourth of the property’s value is designated as the wife’s non-marital property, while the remaining three-fourths is considered marital property.

If, at the time of the dissolution of the marriage, the property has appreciated to a fair market value (FMV) of $60,000 and the mortgage indebtedness has been reduced to $20,000 by the payment of $10,000 of marital funds, the following division would be appropriate: The wife would have one-quarter of the $60,000 fair market value of the property, which amounts to $15,000, classified as her non-marital property and exempt from equitable distribution.  From the remaining $45,000, $20,000, which is the unpaid mortgage balance, would be deducted, leaving $25,000 as the net value of the marital property subject to equitable distribution.  The following is the four-step calculation used in Grant v. Zich:

1. $10K non-marital down payment ÷ $40K purchase price = 25%
2. 25% X $60K FMV = $15K non-marital interest
3. $60K FMV – $15K non-marital interest = $45K gross marital interest
4. $45K gross marital int. – $20K mortgage = $25K as net marital value

The Grant v. Zich calculation provides a rate of return to the non-marital down payment based upon the percentage increase in the home.  Since the home appreciated by 50% (($60,000 – $40,000)) ÷ $40,000), the non-marital interest in the home also increased by 50% ($10,000 X 1.50 = $15,000).   This also means that the remaining increase in the value of the home ($20,000 – $15,000 = $5,000) plus the entire decrease in the mortgage ($30,000 – $20,000 = $10,000) equates to $25,000 in net marital property.  The calculation of the net marital interest can also be expressed as $60K FMV – $20K mortgage balance – $15K non-marital interest = $25K marital interest. 

In Maryland Family Law (2021 7th Ed.) at p. 13-30, Judge Cynthia Callahan explained that footnote 9 of Grant v. Zich is “THE MOST FAMOUS FOOTNOTE OF THEM ALL” and that the Grant v. Zich formula is still applicable whenever a home is purchased in part with non-marital funds and is not titled as tenants by the entirety[1].  (emphasis in original).  Heger v. Heger, 184 Md.App. 32, 90-94 (2009) (affirming the court’s application of the Grant v. Zich calculation to a marital residence purchased in part with non-marital funds and deeded solely to the husband).

This translates into the general formula for calculating the marital and non-marital interest in a home when there has been a non-marital contribution to the mortgage:

1. Non-Marital Down Payment ÷Purchase Price = % Non-marital Interest[2]
2. % Non-marital Interest x Fair Market Value = Present Non-marital Property
3. Fair Market Value – Present Non-marital Property = Gross Marital Property
4. Gross Marital Property – Marital Debt = Net Marital Property

          Step 1 of the Grant v. Zich formula is modified when one spouse buys a home prior to marriage, marries, and the couple uses marital funds to pay the mortgage.  In this case, the spouse’s percentage of non-marital interest on the date of the marriage is calculated using the following formula:

Non-marital % = 1 –  mortgage balance on date of marriage divided by FMV on the date of marriage

The Appellate Court of Maryland affirmed the application of Grant v. Zich to calculate a husband’s non-marital interest in a home purchased 4 years prior to marriage.   Noutchang v. Feutcha, Md.App. 2021 WL 2949513.  The husband’s non-marital interest on the date of marriage was 30%: 1- $171,000 mortgage balance at time of marriage divided by $245,000 fair market value, also at the time of marriage.

Here’s an example on how to properly calculate the non-marital and marital interest of home purchased prior to marriage and titled only the name of one spouse based upon the following facts:

The home was purchased for $250,000 with a $50,000 down payment and a $200,000 mortgage at 5% for 30 years.  A year later, the homeowner marries.  On the date of marriage, the home is now worth $260,000 and the mortgage balance is $197,000.  At the time of the parties’ divorce 10-years later, the home is worth $300,000, and the mortgage balance is $153,000.

          Modified Grant v. Zich formula is expressed as follows:

1. Non-marital % = 1 – mortgage balance on date of marriage divided by the FMV on the date of marriage

2. % Non-marital Interest x Fair Market Value = Present Non-marital Property
3. Fair Market Value – Present Non-marital Property = Gross Marital Property
4. Gross Marital Property – Marital Debt = Net Marital Property

          As applied to the hypothetical:

1. Non-marital % = 1 – $197,000/$260,000 or 24.23%
2. Present non-marital interest x FMV = 24.23 X $300,000 or $72,692
3. Gross Marital Property = $300,000 – $72,692 or $227,307
4. Net Marital Property = $227,306 – $153,000 = $74,308

Math check:

Net equity = $300,000 FMV – $153,000 mortgage balance = $147,000

$72,692 (Non-marital interest) + $74,308 (marital interest) = $147,000

C.  OTHER COMPLICATING SCENARIOS:

What if the title owner of the home refinanced the mortgage in year 5?  The closing costs of the refinance need to be allocated pro rata between non-marital and marital property based upon the non-marital and marital interest at the time of the refinance.  This will result in a reduction in the non-marital interest, because the closing costs were incurred during the marriage and are attributed to marital property.    

What if the title owner of the home sold the home in year 5 and applied some or all of the net proceed proceeds to purchase a new home and the new home was NOT jointly titled?   The closing costs of the sale of the first home would need to be allocated pro rata between the non-marital and marital property based upon the non-marital and marital interest at the time of sale.   Likewise, a pro rata adjustment would need to be made for the closing costs associated with the purchase of the second home, if the net proceeds from the sale of the first home did not cover all of the down payment and closing costs.  This will result in a reduction in the non-marital interest, because the closing costs were incurred during the marriage and are attributed to marital property.   If there were a surplus, the surplus would need to be allocated pro rata between non-marital and marital interest. 

D.     CONCLUSION

To properly calculate a spouse’s non-marital interest in a home in Maryland as part of a divorce, it is necessary to know the amount of the spouse’s non-marital contribution at the time of marriage, the fair market value of the home at the time of marriage, the fair market value at the time of divorce, and the mortgage balance at time of divorce.

[1] In 1994, Family Law § 8-201(e)(2) was amended to state that all real property titled as tenants by the entireties is now marital property no matter the source of funds. 

[2]Step 1 can also be expressed as:

    1 – (mortgage balance ÷ purchase price) = non-marital interest

For example: 1 – ($204,000/$255,000) = 20% non-marital interest