Property Division FAQ

A spouse may be able to protect their property prior to the final order of distribution.  There are special provisions related to Equitable Distribution that will allow a judge to enter either a temporary order on property distribution or an injunction if there is concern about the disappearance, waste or conversion of property in the possession of one party.  Those same provisions also give the judge the ability to enter an order to divide and distribute part of the property before a final equitable distribution determination is made.  An order for partial distribution can only be made after the equitable distribution action has been filed, while an injunction may be granted before an equitable distribution action has been filed in order to protect the property.

Some property may have characteristics of both marital and separate property. Some examples of dual classification would be where the earnings of one spouse are applied to the separate property of the other spouse or where separate property is improved during the marriage, or where one spouse manages the separate property of the other and such efforts significantly increased the value of the property.

The distribution of marital property must be done without regard to alimony and child support.

Generally, one party cannot recover attorney’s fees from the other party during an equitable distribution case. There is, however, one exception to this rule, which allows reasonable attorney’s fees to be awarded. If one spouse sues to retake property that solely belongs to him or her and that property was taken from the marital home by the other spouse, attorney’s fees can be recovered in that action.

Once an absolute divorce is granted, a spouse can no longer bring a claim for equitable distribution. Only claims pending at the time the divorce is granted will be considered.

The right to bring an equitable distribution claim is created at the time the spouses separate.  However, that right must actually be asserted by one of the spouses in order to be considered.

Once the property has been identified, the judge will need to value that property.  This means the judge will assign a fair market value to all marital property in order to aid in the distribution process.  Often, this will require using an appraiser or other expert to determine the amount a buyer would pay to a seller if the property were listed for sale.  The value of the property must be set as of the date of separation.  Any liens or encumbrances on a particular piece of property will be deducted from the value, in order to obtain a net value.  That net value is what the court will be dividing between the spouses.

Identification means that the judge will determine whether one spouse or the other or both have a claim of ownership to a particular piece of property. This will allow the judge to determine the extent of each spouse’s interest in the property.

First, the judge will identify and classify the property. Once the property has been identified, the judge will then value the property. Finally, the judge will decide how to actually distribute the property in a fair and equitable manner.

In classifying the property, the judge must consider when and how the property was obtained. Property is considered to be acquired when payment for the property is made, regardless of when title to the property actually passes.  Any increases in the value of separate property, if those increases are attributable to the action or contribution of one or both spouses, will be shared by the spouses at equitable distribution. Any increase in value of separate property will be traced using the “source of funds” rule to determine whether that increase is considered separate or marital property.

A QDRO stands for Qualified Domestic Relations Order. In order to effectively divide a qualified plan – including pension plans, profit-sharing plans, and 401(k) plans – the court must enter a QDRO. Even if your separation agreement or divorce decree states that you are entitled to a portion of your spouse’s retirement, you will not receive the benefits of that plan without a QDRO signed by a judge.

If you are seeking to divide a non-qualified plan, such as an individual retirement account or an annuity, you will not need a QDRO. QDROs protect the ex-spouse receiving a share of the pension in that they prevent the employee spouse from disposing of the other spouse’s share. A QDRO also ensures that each spouse receiving a portion of the pension or retirement becomes responsible for his or her individual share of the income taxes due on that money.

The survival of you and your spouse is one factor that can influence equitable distribution. If a spouse passes away before an absolute divorce is granted, but while a claim is pending, that pending claim will be barred. If, however, a spouse dies after a divorce has been granted and the equitable distribution claim is still pending, equitable distribution will not be barred. In such a case, the administrator or executor of the deceased spouse’s estate and any heirs whose interests would be affected by the equitable distribution action must be joined in the pending action. If the heirs are not joined, then any order of sale of real property is void as to those heirs.

If you and your spouse have a properly executed agreement on how property will be divided, that agreement might bar a subsequent equitable distribution claim. Not only will a property settlement agreement bar an equitable distribution claim, but written premarital and postnuptial agreements may also cause a bar.

Although equitable distribution presumes that an equal split of the marital property between the spouses will be fair, and most judges in North Carolina favor an equal split, a spouse can make an argument for unequal distribution.  Because the parties must present evidence to support an unequal distribution, and because most cases lack facts to actually support that, most cases result in an equal division of property.  Additionally, most cases that settle result in an equal division of property, unless the spouses can agree otherwise.

Some property cannot be classified as either marital or separate property.  Any property that is acquired after the date of separation doesn’t fit within the definitions of either marital or separate property.  In those cases, that property must be treated as a factor in the distribution of other property.

Once the judge identifies the property, the property will then need to be classified as either marital or separate. The classification process must be supported by both evidence and findings of fact by the judge.

Although the equitable distribution rule presumes that an equal split of the marital property between the spouses will be fair, and most judges in the state favor an equal split, a spouse can make an argument for unequal distribution.  There are numerous factors outlined the statute on equitable distribution that a judge can use to justify an unequal division of the marital property.  In order for a judge to consider those factors, one of the parties must present actual evidence to the judge on that factor. Among the factors a judge may consider are the following:

• The income, separate property, and debts of each spouse at the time of the division
• Any alimony or support orders against one spouse from a previous marriage
• The length of the marriage and the age and relative health of each spouse
• Which spouse has custody of any children and their potential need to stay in the home for the children
• Any future expectation of retirement benefits that haven’t vested at the time of separation
• Any effort made by one spouse to acquire a particular piece of property
• The effort and support provided by one spouse to the education or career of the other
• Any efforts or contribution by one spouse to increase the value of separate property of the other spouse
• How easy it would be to divide the martial of state into liquid assets
• Any interest in a business and the difficulty of valuing and dividing that interest
• Tax repercussions of property division
• Any actions by either spouse to decrease the value of marital property after the separation
• Any other factor the judge considers to be relevant and proper

In North Carolina, the process by which property is divided when spouses get divorced is called Equitable Distribution.  If a judge is making the final determination about property division, the final order may come before or after the divorce is granted.  While the final judgment on equitable distribution is pending, the spouse who has possession of a particular piece of property will have use of that property.

Property includes the items and things people own, or their assets, as well as their debts.  Any assets and debts that were obtained during marriage and are still owned by the spouses when they separate are considered in the equitable distribution decision.  The assets and debts will be valued to assign a net value to the marital estate.  If a marital estate happens to have a negative value, then each spouse will be responsible for a portion of that debt, depending upon how the judge makes the equitable distribution determination.

Marital property is defined in section 50-20(b)(1) of the General Statutes of North Carolina. Essentially, marital property includes property obtained during the marriage and before separation, regardless of whether it is obtained by one or both spouses. Anything that is not considered separate property, if presently owned on the date of separation, will be considered marital property and subject to equitable distribution. Presently owned refers both to the time of ownership and the right of ownership.  The time of ownership means that one or both of the spouses has some ownership interest in the property on the date they separate. If one of the spouses has taken marital property without accounting for it, the ownership time may even be before the date of separation. The right of ownership portion of presently owned property refers to the interest a party can claim in the property, despite who actually possesses the property, holds title to the property, or any interests that may be claimed by others.  There is also a presumption contained in the statutes that all property obtained after the parties are married and owned before the parties separate is considered marital property, unless specifically defined as separate property by statute or rebutted by a preponderance of evidence.

Separate property is defined in section 50-20(b)(2) of the General Statutes of North Carolina, but essentially, separate property is any property that one spouse owned before the marriage.  It also includes property inherited by only one spouse and gifts to only one spouse. Whether or not the inheritance or gift is acquired by one spouse during the marriage, it is considered separate property and is not subject to equitable distribution. However, a gift from one spouse to the other during the marriage will be considered marital property, unless the intention for it to be separate is expressly stated.  Professional and business licenses, such as a medical or law license, which would terminate if ever transferred, are considered separate property. Any income received from separate property or increase in value in separate property remains separate property.  However, the increase in income in separate property must be a passive increase, resulting from market factors, inflation, or action by someone other than one of the spouses. If the increase in income can be attributed to the active effort or contribution of one or both of the spouses, then that increase in value is considered marital property. If separate property is exchanged for a different piece of property, the new piece of property remains separate, even if both spouses are on title unless the intention for the property to become marital property is expressly stated in the exchange.  However, if separate property is used to purchase real estate and both spouses are listed on the title, that is generally interpreted as being a gift of separate property to the marital estate, which then becomes marital property.  That interpretation can be rebutted only by clear and convincing evidence.

Defenses that can be used against equitable distribution include: absolute divorce, a prior property settlement, reconciliation, death, and federal law.

Many times, you won’t incur a tax liability when selling the marital home during a property division, and there are ways to ensure that you avoid those tax implications. First, the property you are selling must be your principal dwelling. You can claim several homes as a principal dwelling, giving you the ability to make a tax-free gain on several properties. A house must meet an ownership test set forth by the IRS in order for it to be considered a principal dwelling. Only one spouse has to meet the requirements of the ownership test when a couple attempts to make a tax-free sell; therefore, if you owned a home for the last two years, but you just added your new husband to the title when you got married six months ago, that home can still qualify under the ownership test. However, both spouses must pass the use test of living in the residence for two years. Note that the shared use does not have to take place during the marriage. If you and your now-husband shared the home for 1½ years before tying the knot and then six months as newlyweds, the IRS will allow you to claim the exemption. Military personnel are exempt from the two-year use requirement.

Once you and your spouse have sold a marital property, you must determine, based on profits, whether there are tax implications. If you sell your home for $2 million, you may not have a tax implication if your profit portion isn’t more than $250,000 if you file alone and $500,000 if you file together. You are allowed to add the cost of improvements to offset your gain and lower your profit margin. If you sell your home with a profit margin exceeding the above-mentioned limits, you may still be eligible for tax-free gain if you sold your home for a change in health, employment, or unforeseen circumstances. Before selling your marital home, it is best to seek advice from your attorney and tax advisor.

In the past, reconciliation would void property provisions within a separation agreement. Now, the courts draw a line between pure separation agreements and contracts for the purpose of dividing property, i.e. property settlements. Property settlements are construed according to the intent of the parties and the language used in the contract. Reconciliation would cancel out a release of property rights only if the release of those rights in such a property settlement “necessarily” depended on the parties living separate and apart.

States have the general authority to handle family law matters, including equitable distribution. However, there are times when federal law can take precedence over state equitable distribution law. One such occasion is in the distribution of Social Security benefits. Federal Social Security laws, not North Carolina state law, govern the distribution of these benefits. Similarly, state equitable distribution laws do not govern veteran’s disability benefits. Servicemen’s retirement pay is distributed following the language of the Uniformed Services Former Spouses’ Protection Act and G.S. 50-20(b)(1).

If you and your spouse can agree on how to divide your property, then you can enter into a separation agreement.  That agreement will document the property division that you and your spouse have agreed on.  However, if you and your spouse cannot agree on how your property will be divided, you will have to turn to the court for a judge to make that determination.

Although the judge can consider any factor they determine to be relevant and proper, fault is not relevant in the equitable distribution decision, unless that fault is related to decreasing the value of marital property.