A Divorce Court Should Not Calculate the Purported Rental Value of a Mortgage-Free House as Non-Taxable Income for the Purpose of Calculating Child Support but Should Instead Consider the Mortgage-Free Housing Value as a Special Circumstance

Roger and Julie Schlafly were married in December of 1996, and had two minor children. Roger and Julie filed for divorce in October 2003, and split custody of the children evenly. The divorce court ordered Roger to pay an initial temporary support payment of $3,000 per month. At a later hearing, the divorce court ordered Roger to pay $2,759 in child support, which deviated from the guideline amount of $1.697. The divorce court based the deviation on the fact that Roger was living mortgage-free in a house with a fair rental value of $3,000 per month. However, at wife’s divorce attorney’s request, the divorce court made the support payment retroactively modifiable to be revised upon gathering more information about Roger’s actual income.

Eventually, the divorce court modified the child support order to $2,112. In determining the new payment, the divorce court imputed a 3% rate of return on Roger’s stock market portfolio as taxable income and imputed $3,000 in non-taxable income per month based on the mortgage-free house. Roger’s divorce lawyer filed a motion for modification and contested the child support order and the order requiring that he pay attorney’s fees. Roger argued that the divorce court ‘“erroneously deviated from the guideline’ amount by” imputing a rate of return that exceeded his actual income from the stock portfolio, including $3,000 of non-taxable income because of his mortgage-free house, and adding $500 to the support order for discretionary extracurricular activities.

First, Roger’ divorce lawyer argued that the divorce court was not authorized to impute additional income because his stock portfolio was “income-producing” and thus the divorce court was required to use the actual income Roger made from the portfolio. The Court of Appeal agreed with wife’s divorce attorney and upheld the divorce court’s decision to impute a 3% rate of return on Roger’s $2.9 million in assets. Reasoning, that the divorce court may, in its discretion, consider the earning capacity of the parent despite the parent’s actual income if it is in the best interest of the child. The Court found that Roger had underutilized income-producing assets and that imputing a higher rate of 3% was in the best interest of the children. Further, the Court determined that 3% interest was a reasonable rate of return because it was the minimum anticipated return on investment for bonds or certificates of deposit.

Second, Roger’s divorce lawyer objected to the divorce court including $3,000 per month of non-taxable income relative to his mortgage-free house as part of the calculation of his child support payments. The Court of Appeal determined that the proper approach is to first calculate the guideline amount of child support payments based on the income of the supporting parent and then adjust the amount based on free-housing benefits. However, the adjustment should not be categorized as non-taxable income. The Court explained the presumption that the guideline support is correct, is rebuttable if there is evidence that the formula would be unjust based on special circumstances. A parent with a significantly lower housing payment may constitute special circumstances. Thus, the divorce court was able to consider Roger’s mortgage-free housing as a “special circumstance” in determining the amount of child support. However, the Court found the divorce court abused its discretion by considering the $3,000 mortgage-free housing value as non-taxable income. Finally, the Court approved the $500 add-on for children’s activities and approved the order of attorney’s fees.

In re Marriage of Schlafly (2007) 149 Cal. App. 4th 747