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Understanding “Hybrid” Property in a Virginia Divorce

When spouses divorce in Virginia, the law requires an equitable distribution of marital property. Generally, all property will be defined as marital property or separate property. Marital property is property acquired during the marriage using marital funds; it belongs to both spouses and it must be divided equitably upon divorce. Separate property is property that either spouse acquired before the marriage, or received as a gift or inheritance during the marriage; it will typically be kept by the spouse who owns it. However, there is a third category: hybrid property, which is a combination of the two.

Hybrid property can be created in a number of ways. For instance, one spouse may use money that she acquired before the marriage to pay the down payment on a house that the couple purchases during their marriage, and that then appreciates in value. In another example, one spouse may have an investment account that he owned prior to the marriage, but contributed funds to during the marriage.

Upon divorce, the parties or the court must determine how to divide hybrid property, and a number of formulas have been used in different cases. A method known as the Brandenburg formula is the most common: the separate property interest is found by multiplying the total equity by the separate contribution’s fraction of the total contribution, and the marital property interest is found by multiplying the total equity by the marital contribution’s fraction of the total contribution. The Brandenburg formula is almost always used to determine the marital shares of accounts such as IRAs and 401(k)s. However, it is not always the best method for real estate encumbered by mortgages, since it does not take into account factors such as mortgage interest and property taxes.

Since 2006, the Keeling method has often been used as an alternative: when one spouse’s contribution to the down payment on real estate is a certain percentage of the purchase price, then that spouse’s separate property interest is the same percentage of the value of the home, with the remainder being marital property.

Finally, the method of reasonable rate of return may also be used, whereby a certain rate of return is applied to a spouse’s separate investment in an asset, to arrive at that spouse’s separate property interest.

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