Going through a divorce can be a hugely difficult and emotional time. On top of that, figuring out what to do with rental properties you own together can make an already complicated process even more overwhelming. But you don’t have to go through this alone.
This article breaks down the ins and outs of dealing with rental properties during divorce in a straightforward way. It offers practical guidance to help make this uncharted territory feel less daunting. Whether you just need a basic overview or want specific advice, you’ll find useful information here.
The goal is to equip you with knowledge and strategies so you can make the best decisions for your situation. Even though divorce takes an emotional toll, having the facts empowers you to protect your interests and look ahead to the future.
Understanding Divorce and Property Division
When couples file for divorce, one of the most significant issues they need to settle is how to divide their assets and property, including any rental properties. Depending on whether you live in a community property state or an equitable distribution state, the division of assets like houses, cars, businesses, investments, retirement accounts, and other marital property can get complicated.
This is especially true when a divorcing couple owns rental property together. Determining who gets to keep the rental properties after divorce and how to split the value, expenses, and rental income requires understanding state laws, working with professionals like real estate appraisers and divorce attorneys, and negotiating an agreement with your ex-spouse.
What is Equitable Distribution in a Divorce?
When a marriage ends in divorce, most states follow the principle of equitable distribution for dividing marital property. This means assets acquired during marriage are split in a fair and just manner, but not necessarily 50/50.
The court considers various factors like each spouse’s financial contribution, needs, earning potential, and behavior during the marriage. Ultimately, the judge decides on a division of assets that is equitable while not necessarily equal.
Marital Property Vs. Separate Property: What’s the Difference?
During a divorce, it’s crucial to distinguish marital property from separate property. Marital property includes assets, income, and debts acquired or earned by either spouse during the marriage. Separate property is anything owned before the marriage or received as a gift or inheritance during the marriage.
Separate property is not subject to division, while marital property must be divided equitably. This distinction directly impacts how rental properties are classified and divided in divorce.
How are Rental Properties Classified in a Divorce?
Whether a rental property will be considered separate or marital depends on:
- When it was acquired: Property bought before marriage is separate. Property purchased during the marriage is generally marital, even if title is under only one spouse’s name.
- Source of funds: If a rental property was acquired using separate property funds (e.g. inheritance), it may be deemed separate property. If marital funds were used, it is likely marital property.
- Active appreciation: Any increase in the rental property’s value due to improvements or market factors during the marriage is considered marital property.
- Location: In community property states like California, almost all assets acquired during marriage are considered communal, including real estate.
So in most cases, rental properties purchased or appreciating during the marriage are marital assets subject to equitable division in divorce.
How to Divide Rental Properties During a Divorce?
There are a few options for dividing rental property in a divorce:
- Sell and split proceeds: The property can be sold and the sale proceeds equally divided. This allows for a clean break, but selling real estate can be complicated.
- Buyout: One spouse buys out the other’s share of equity and keeps the property. This allows one person to retain the rental income.
- Partition: The property is physically divided if feasible, for example into separate condo units.
- Alternate possession: Ex-spouses become tenants in common and alternate residing in the property at different times.
- Co-own and split income: Ex-spouses continue co-owning the rental property as an investment and divide rental profits. This requires high cooperation post-divorce.
You must decide which option works best based on factors like the property value, mortgage, taxes, and maintenance costs.
What Role Does the Value of the Property Play in a Divorce?
Valuing the rental property is crucial, as asset valuation impacts the overall division of marital property in divorce. Appraisals determine the property’s fair market value, which becomes the basis for:
- Calculating equity if sold
- Determining the buyout amount if one spouse retains ownership
- Assessing asset value if dividing the total marital pot
- Deciding ownership percentages if co-owning post-divorce
- Negotiating offsets if one spouse keeps the rental while the other gets different assets of equal value
Hiring professional real estate appraisers can remove guesswork and bias in determining accurate property values. This leads to an equitable division of all marital assets.
Leased Property During a Divorce: What Happens?
If the rental property is currently leased to tenants, their lease agreement must be honored during and after the divorce. Both spouses remain obligated to uphold the lease terms until sold, transferred, or the lease period ends.
Any rental income received after separation must be disclosed and accounted for during divorce proceedings. The rental profits may be deemed marital income and divided equitably.
Transferring leased property requires properly notifying tenants of the ownership change per state laws. An experienced lawyer can ensure legal obligations to tenants are fulfilled during property division.
How an Experienced Divorce Attorney Can Help?
Dividing rental properties as part of a divorce is nuanced and high-stakes. Working with an experienced divorce lawyer is crucial to protect your rights and achieve the best outcome. Here are some of the ways a lawyer can help:
- Advise whether a rental property should be classified as marital or separate based on state law and documentation.
- Hire professional appraisers to accurately establish the property’s market value and equity.
- Review leases and finances to project income versus expenses for negotiating property division.
- Calculate tax impacts of transferring or dividing deeds.
- Draft clear divorce agreements outlining ownership and responsibilities for jointly owned rental properties.
- Develop creative solutions like phasing property transfers over time to limit tax liability.
- Anticipate problems that could arise with joint property management and address them upfront in the settlement.
- Negotiate and argue aggressively on your behalf to secure the best deal regarding rental properties.
With an attorney well-versed in family law on your side, you can feel confident your rights and interests are protected throughout the divorce process and in the final property settlement. Don’t leave division of valuable rental assets to chance.
Post-Divorce Property Management: What to Expect?
If you end up co-owning a rental property with your ex-spouse after the divorce is finalized, some considerations going forward include:
- Paying any joint debts and expenses related to the property
- Continuing to split rental income and tax obligations
- Agreeing on processes for property repairs and improvements
- Reviewing rental agreements and tenant terms together
- Deciding if/when to jointly sell the property in the future
To reduce headaches, it helps to consult a lawyer when drafting the co-ownership terms in your divorce agreement and work with a property management company post-divorce.
Dividing rental properties during divorce takes careful consideration of many legal, financial and tax factors. Here are some key things to keep in mind:
- Divorce involves the division of marital property, which can include rental properties.
- Equitable distribution is the principle used in most states to divide marital property in a divorce.
- Rental properties can be classified as either marital or separate property, depending on when and how they were acquired.
- The value of the rental property plays a crucial role in a divorce settlement.
- In California, all assets acquired during the marriage, including rental properties, are considered community property and divided equally.
- An experienced divorce attorney can provide invaluable assistance during the property division process.
- Post-divorce, the spouse retaining the rental property will be responsible for its management, or they may choose to hire a property management company.
Dividing rental properties in a divorce definitely adds challenges. But with professional support and staying focused on your long-term financial interests, you can achieve an outcome that sets you up for future success, whether that means joint ownership, buyouts, or a clean split.