With the state of the real estate market these days, it is not uncommon for divorcing parties to have to decide what to do with a house that is “underwater” (where the mortgage is greater than the value of the home). While it may seem fair to assign a “negative value” to the home and award the party taking the home additional marital property to account for the negative asset, that is generally not how Minnesota courts have been treating underwater real estate.
The Minnesota Court of Appeals recently ruled on the unpublished case In re the Marriage of: Helen Catherine Giuliani, petitioner, Respondent, v. Dirk David Anderson, Appellant. The court of appeals remanded the case back to district court with instructions to “remove from the division of marital property a ‘debt’ representing the shortfall in equity in the homestead to cover wife’s non-marital interest, or support the inclusion with findings and authority.” This means the Court cannot force someone to keep a property with negative equity. So if one party decides to keep an underwater home that is their choice. When negotiating this issue though, the intangible value of keeping children in the home, or avoiding the credit hit through foreclosure or short sale may be taken into consideration.
In some cases, it may be appropriate to examine what the equity was for. For example, if the parties took out an additional loan against the home to finance something like a boat, or an RV, the person taking that asset may be awarded the corresponding amount of debt, or be ordered to sell the asset to offset the negative equity. Most courts are valuing underwater homes at $0 (not assigning a negative value), but there are certain circumstances where assigning a negative value may be the most equitable route for the Court to take.