Dividing your assets during a divorce doesn’t have to be complicated. Maybe you’re willing to give your spouse the dining room set as long as you get to keep the living room furniture. If you and your spouse own rental property, however, things can get a lot more complex. Do you keep properties that are earning money, sell them and split the earnings, or buy out your spouse? The right solution will depend on your preferences, your finances, and the properties themselves.
Marital Property or Not?
Rental properties can be a lucrative investment. Monthly rental income can either provide for ongoing income or can pay the mortgage of the property as it grows in value. That makes most rental properties a valuable asset during divorce negotiations. In a few cases, a rental property may be underwater (you owe more than the value of the property), which means that it could represent a debt that you and your spouse will have to figure out how to split.
The first step in sorting out rental property during a divorce is to ensure that it is marital property, meaning that you and your spouse are both entitled to an interest in it. As long as you purchased the rental property during your marriage, it will be marital property. If one spouse purchased the property before marriage and the other spouse did not contribute to the property in any way and no shared money was used on the property, it may be the sole property of the purchasing spouse. Your attorney can help you determine whether you have an interest in the property.
Before you begin negotiations on the rental property, you’ll need to know the value of the property. If you and your spouse are both committed to a peaceful divorce, then share the cost of a property appraisal. If you’re facing an adversarial divorce, then you’ll need to pay for your own appraisal.
Once the appraisal is in, it’s time to determine how you want to divide your rental property or properties. You have four main options:
Option One: Continue to Rent and Split the Proceeds
Perhaps your rental properties are making a good amount of income or you don’t want to sell them due to tax reasons. Maybe you are underwater with your properties and selling them would result in a significant loss.
In any of these scenarios, you may want to simply continue renting out the property. If your spouse agrees with the plan, we suggest creating a business partnership and putting the properties into the partnership. The rental income would go into a business account, with assets split after housing and business costs have been covered.
Going into business with your ex-spouse might feel weird, especially if you harbor bad feelings or want to move on with your life, but there are ways to create distance. For instance, a partnership agreement can protect both your interests. You can also hire a property management company to perform the day-to-day management of the properties so that you don’t have to regularly be in contact with your ex.
Split the Properties
If you and your spouse own a variety of rental properties, you may be able to work out an agreement where you split up the properties, with each spouse taking full ownership of their share. To make this work, you’ll need to determine a fair way to split properties so that each spouse receives an equivalent value. Since it is rare for a couple to own an even number of properties of the same value, you may need to give your spouse more of other assets if his properties are worth less than yours or vice versa.
Buy Out the Other
Maybe you are the driving force behind your rental property investments. You picked out the properties, found tenants, performed repairs, etc. This is your investment. If your spouse is willing, you can buy him out of his ownership stake in the properties.
This option may sound good on the surface, but it can be financially difficult to pull off. To buy out your spouse, you’ll likely have to refinance the properties, which means qualifying for a mortgage on your own at the same time you’re splitting your assets in the divorce. You’ll also need to be responsible for all payments and fees related to the rental properties, so if you aren’t confident in your ability to rent them out, this option might not be right for you!
Sell the Properties
If you and your spouse can’t agree on how to split your rental properties, a court will most likely order you to sell them. Selling the properties may also be the right option if you want a clean break from your spouse, or if you need assets to help you transition into your new life after a divorce.
Before you make any decisions regarding rental property, it is a good idea to speak with an experienced divorce attorney to understand all of your options, including the financial and tax implications of each.