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Active Vs. Passive Appreciation: What’S The Difference

Getting a divorce is difficult enough. When you co-own a home or business with your spouse, it can become even more complicated and emotional. 

If you’re wondering how this type of situation is worked out, this post is for you. We’ll cover everything you need to know about divorce for home or business owners, including an overview of active and passive appreciation. 

What to Expect from Business Valuation

If you and your spouse are business owners and are divorcing — and no longer want to continue working or living together — you will need to start by having the business or property valued. Of course, this will need to be done by a neutral third party who can give an unbiased accounting of the asset’s worth.

Having the asset valued will ensure that neither party is: 

  • Lying about their income
  • Using the business to write off personal expenses
  • Attempting to undervalue the home or business
  • Acting in a shady or dishonest manner

It will also help establish the company’s profitability and its tangible and intangible assets. You can’t hope to fairly divide assets during a divorce without a proper valuation of the business or home that is co-owned. 

Typically, you have two options in front of you when it comes to having an asset valued. First, you can work with your spouse to choose one neutral accountant to perform the valuation. Or, you can both choose to have separate accountants perform the valuation and compare the two outcomes. 

It is more likely that court involvement will become necessary with the second option. If both accountants provide different valuations, it could result in a disagreement that is hard to overcome. 

Understanding the Difference Between Active and Passive Appreciation

When an asset is being valued, the forensic accountant must specify the difference between active and passive appreciation. This will make a difference in how the court decides to divide and allocate certain assets.

Active appreciation is often included in the equal distribution of assets, while passive appreciation is not. Keep reading to get a better understanding of the difference between the two. 

Active Appreciation

Active appreciation occurs when one party can prove that the home or business appreciated significantly because of their own efforts or management. 

For example, if any marketing, management, or hiring practices actively increased the value of the business, that would be considered fair game in a divorce. Likewise, home improvement efforts would be considered active appreciation.

Proving active appreciation is not always easy to do. Sometimes, it’s not clear whether a home or company’s value increased because of active or passive valuation. 

If you want to clarify this area of your divorce, you should hire both a qualified attorney and accountant who can give you a clear perspective on where your home or business stands. 

Passive Appreciation

On the other hand, passive appreciation is not the direct result of anyone’s efforts to increase the value of a home or business. 

Instead, passive appreciation occurs as the result of external market trends and conditions. In other words, if the asset has grown in value due to no effort on the part of the owner, it’s considered passive appreciation and will not be included in the division of assets. 

Call a Qualified Attorney for the Best Results

Dividing assets in a divorce is a complicated task. If you want to ensure that you get everything you deserve in the separation, make sure you hire the right attorney. Call Cohen Family Law in Phoenix, AZ, to learn more about this type of family law and schedule a consultation.

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