“What’s yours is mine What’s mine is mine!”: Keeping your separate property separate
It is well known that the family home is classified as relationship property under the property (relationships) act 1976 (“the act”). Where the position becomes murky is with regard to additional properties owned by one partner such as an investment property.
If an investment property was purchased:
• prior to the relationship commencing and was neither in contemplation of the relationship or intended for the common use or benefit of both partners; or
• using separate property funds (such as inheritance funds or funds received by way of a distribution from a trust), providing that the property was not purchased for the common use or benefit of both partners, then the investment property is likely to be the separate property of the owner partner. In the event of separation, the owner partner would be able to retain the property as his/her separate property without any adjustment to the non-owner partner.
However, this is not the end of the matter as the non-owner partner may still be able to claim against any capital gain on the investment property. In the current property market, capital gains can be significant so it is important to be aware of the potential for a relationship property claim.
The case of KRJ v RK  NZFC 823 is a good example of when a non-owner partner can benefit from a capital gain made on the sale of separate property. In this case the husband owned a property in Poolburn, Central Otago that was his separate property under the Act. Together, the husband and wife renovated the property which included structural improvements, building a farming shed on the property, painting the home and laying new carpet. These renovations cost approximately $8,000 and were paid for by the husband out of his income. The property was subsequently sold and a capital gain of $167,000 was realised. The husband and wife then separated and the wife initiated relationship property proceedings in the Family Court. The Court held that the $167,000 capital gain was relationship property to which the wife was entitled to half.
How was the wife able to benefit from the capital gain on the husband’s separate property?
Section 9A of the Act sets out the ways in which separate property can become relationship property. Section 9A(1) provides that any increase in the value of separate property, which is attributable (wholly or in part) to the application of relationship property, is relationship property. Income earned during a relationship is relationship property. Therefore if income (which is relationship property) is applied to the investment property (which is separate property) and the value of the investment property increases as a result, then the increase in value becomes relationship property. The pre-relationship value of the investment property remains separate property, but the increase in value, which is attributable (and it is sufficient that the increase is only partly attributable) to the application of relationship property, becomes relationship property. Under the equal sharing provisions of the Act, the non-owner partner is entitled to a half share of that increase.
Section 9A was applied in KRJ v RK on the basis that the husband used his income to pay for renovations to the property. Interestingly, the Court conceded that the capital gain was primarily due to the inflationary property market rather than the $8,000 worth of capital improvements. However due to the wide ambit of section 9A(1), the wife was entitled to half of the capital gain
Source: InBrief AUTUMN 2016