Son Entitled to Appreciation in Home’s New Value

Question: My son and his girlfriend bought a home in North Phoenix three years ago as tenants in common. They each contributed $15,000 for the down payment, and my understanding is that they have been splitting the monthly mortgage payments and other home expenses. Last year they had a baby, and they needed another bedroom. We loaned our son $20,000 to add on a bedroom. Although my son and his girlfriend are happy now, what happens if they break up and have to sell the home? Will my son get back from the proceeds the $20,000 cost of the bedroom so that he can repay the $20,000 loan to us?

Answer: If your son and his girlfriend split up, the sale proceeds from the sale of the home would not be divided equally. Your son would be entitled to the increase in value of the home attributable to the $20,000 contribution made by your son to build the bedroom. For example, if the sale proceeds were $100,000, and the home increased in value by $30,000 because of the third bedroom, your son would first get $30,000 of the sales proceeds of $100,000, and the remaining $70,000 would be equally split $35,000-$35,000. The calculation would be $65,000 ($30,000 for the bedroom plus $35,000) to your son, and $35,000 to the girlfriend.