Inherited and Gifted Funds Used to Purchase Farmland Were Exempt from Divorce Property Division

April 11, 2023 | Jennifer Harrington

The Iowa Court of Appeals examined the distribution of property during a divorce where one spouse had used inherited and gifted property to fund the purchase and repay debts associated with the marital home and farmland. The Court of Appeals determined that the funds used on the farmland were exempted from the property division, and ordered the contributed amounts returned to the spouse. The funds used to purchase the marital home were not exempted from the marital property division.  

Legal Background

Iowa Code §598.21(5) states that in a divorce, the court “shall divide all property . . . equitably between the parties.” This includes property that was acquired prior to marriage. The only exception to the “all property” rule is property that was gifted to or inherited by one party. Gifted and inherited funds are exempt from property division during divorce unless it is inequitable to exempt those funds.


Derek and Debra George were married in 1998. At that time, Debra George had funds available from a federal service survivor annuity due to her father’s passing and an investment account gifted from her mother. In addition, she had an IRA and stocks received from a family member’s estate. The value of the gifts and inheritance totaled approximately $315,000 when the Georges married.

During the marriage, Debra used these funds to purchase various assets. $29,000 went towards the purchase of a marital home and adjoining lot. During the marriage, this home was sold with the proceeding being placed into a joint account and used to build a new home. Additionally, Debra used  $7,500 as a down payment and years later paid $44,000 to satisfy the remaining debt on a farmland parcel. For another farmland parcel, she contributed $248,042.38 towards the mortgage on the property.

In 2019 the couple divorced. They stipulated that they would split the retained equity of their assets equally. They agreed that Derek would retain the farmland and Debra would retain the marital home. However, they disagreed over whether the gifted and inherited funds used to purchase assets should be set aside when determining the funds to be equitably divided. Debra asked the court to reimburse her for these funds because they should have been exempt from the marital property division. Derek proposed a distribution plan that did not reimburse Debra for the inherited and gifted funds used to pay for the home and farmland.  Further, Derek claimed that the retained equity calculation should be adjusted to take into account the capital gain that would occur if the land and equipment were sold. However, at trial Derek admitted he did not plan to sell the assets.  

The district court did not exempt Debra’s gifted and inherited funds from the property division, finding that they were “invested in marital assets.” Further, the district court characterized these funds as “premarital funds.”


On review, the Court of Appeals determined that the funds were gifted and inherited property and not premarital property. Therefore, there was a presumption that the funds were exempt from the property division. The court then examined whether it would be inequitable to exempt the funds, noting that comingling these funds with marital property is “not enough, alone, to require the property to be divided as a marital asset.” The court examined the home transactions and farmland transactions separately to determine whether exempting the contributed funds was inequitable.

The court found that funds used for the farmland transactions were exempt from the division. The funds were easily traced to the enhancement of the property. While the appreciation of the initial investment is marital property, the initial investment retained its gifted and inherited characterization. The court ordered that the funds contributed toward the farmland were exempt from the asset division.

The court found that the funds used for the marital home were not exempt from the asset division because the funds were not easily traceable after the house was sold and the proceeds were used to build a new home. The court further noted that Debra is retaining the home in the asset division. 

Finally, the court examined Derek’s request to consider the capital gains that would arise from the sale of farmland or equipment. The court found that this was not necessary because Derek was not planning to sell the assets and could obtain a loan using the farmland as collateral to make the equalization payment. The tax consequences are only considered in the asset division when the court forces “the sale of the property or order[s] a lump-sum payment that would require the sale of property.”