Getting a divorce can affect nearly every aspect of an individual’s life, from their finances to their living situation, including, but not limited to their:
- Debt;
- Property possession;
- Taxes;
- Employment benefits; and
- Other legal rights.
Divorces typically also involve numerous other legal issues. In divorce proceedings, issues may arise such as:
- Child custody and visitation;
- Distribution of property between the parties;
- The divorce proceeding may be subject to various filing requirements and court fees;
- Concerns about immigration, especially marriage-based immigration;
- Concerns regarding employment, especially spousal employment benefits; and
- Divorce can change the characterization of debts and assets in the total estate in regards to taxes and estates.
When an individual is considering getting a divorce or is getting a divorce, it is important to note that every state may have different laws that govern the divorce process. This applies especially to the laws governing property distribution during a divorce or following a legal separation.
How Will Rental Properties Be Divided in a Divorce?
When individuals obtain a legal separation or divorce, it is common for them to divide their property either through a settlement agreement or following court proceedings. Property issues in a divorce may be determined by whether the property is shared between the spouses or is the separate property of one of the spouses.
These determinations will be made in court. Property that is determined to be separate property of one of the spouses will not be relevant to the divorce proceedings because it belongs to that spouse and will not typically be subject to division by the court.
Shared property, on the other hand, belongs to both of the spouses together. This means that the future owner of that property will be determined by the court if the spouses do not come to an agreement.
Typically, if property was acquired by one spouse before or after the marriage, it will be classified as separate property, subject to state laws. In most situations, property that was acquired during the marriage will be classified as shared property.
In many cases, couples can work together and reach a divorce settlement agreement that outlines the division of their properties and debts. They submit this agreement to the court for approval and, if approved, it becomes part of their finalized divorce.
What Are Some Legal Considerations for Rental Properties in a Divorce?
There are numerous legal considerations for rental properties in a divorce in addition to those discussed above. If the couple had a prenuptial agreement, it may specify which property each party will own in the event of a divorce.
The spouse’s property rights in their divorce will depend on the state in which they reside, as each state has its own laws governing how property is distributed in a divorce. States are either community property states or non-community property states.
Community property states include:
- Arizona;
- California;
- Idaho;
- Louisiana;
- Nevada;
- New Mexico;
- Texas;
- Washington; and
- Wisconsin.
In these states, the assets of the couple are classified as either community property that is owned equally by both or as separate property belonging to one spouse only. In a divorce, community property is divided equally between the ex-spouses, while each ex-spouse keeps their own separate property.
Every other state follows the principle of equitable division, meaning a division that is fair to both parties instead of a 50/50 split. Factors courts will consider include:
- The earning history of each spouse;
- The earning potential of each spouse; and
- The duration of the marriage.
This means that if spouses owned a rental property together, how it will be distributed will depend on the state.
How Will the Rental Property Be Valued?
Property value is the total value of a piece of land or a structure at the time of transfer or sale. The value of a property may vary depending on:
- Use and abuse;
- Growth of neighborhoods and communities;
- Property improvements, repairs, or renovations;
- Local zoning legislation changes;
- Number of owners; and
- Regional costs and markets.
Property value is typically determined using an appraisal. An appraisal is a professional evaluation of the market value of a property.
This process typically involves estimating the worth of a house based on various factors, including its:
- Size;
- Location;
- Age;
- Condition; and
- Comparison with similar properties sold in the neighborhood.
What About Alimony and Rental Income?
There are tax considerations and implications that an individual should consider when they are seeking alimony and keeping a rental property for income. Alimony is paid to a former spouse as ordered by a court, depending on state law and the financial status of the spouses.
Some alimony payments are deductible on the paying spouse’s income tax. It is important to note that a receiving spouse must include the alimony payments they receive as income tax.
The only payments that must be included are those that were assigned by the divorce decree or property settlement agreement as income. In addition, for income tax purposes, rental income is considered the same as regular income.
This may be important for an individual to consider if they are receiving both alimony and rental income payments, it may have a major effect on their income taxes. In some cases, an individual may not want to take on the tax responsibilities for both additional types of income.
Should I Sell or Keep My Rental Property?
There are pros and cons to keeping a rental property. There may be issues between the ex-spouses with sharing or co-owning a property following their divorce.
If an ex-spouse acquires a negative judgment or an outstanding loan, it is possible that the only remaining asset that an individual’s ex-spouse has with any value is the co-ownership of the rental property. In this case, creditors can place a lien on the property until the individual pays off their debt.
If the spouses had an amicable divorce, they may be able to come to a buyout agreement where one of the spouses retains ownership of the property and title is transferred to that spouse’s name. The other ex-spouse would then receive compensation as a buyout.
In many cases, however, a divorce is not amicable. If the ex-spouses held title as joint tenants, one of the parties may prepare a Notice of Severance.
Will Co-Parenting Affect My Rental Property?
Although it may not seem related, being required to co-parent may have an affect on other issues between the ex-spouses, such as rental properties. This is because these issues will often be impacted by how the relationship between the ex-spouse is at the time.
For example, if one of the spouses becomes upset regarding an action taken related to the rental property, they may attempt to get back at their ex-spouse by raising custody issues. It may not be a common occurrence, but it is something an individual must consider if they own a rental property with their ex-spouse.
What if We Come to an Agreement About Our Rental Property in the Divorce?
It is important for the ex-spouses to consult with an attorney and create a well-drafted agreement regarding their rental property that will protect both of their rights and outline the steps that will be taken when certain issues arise. Having a clear and well-drafted agreement will help ensure that issues do not arise in the future.
What Should I Keep in Mind about Rental Properties and Divorce?
There are many things that an individual should keep in mind regarding their divorce and rental property. It is important to remember that things can always change, including either ex-spouse’s financial situation.
If an ex-spouse has financial troubles and files for bankruptcy, the other ex-spouse may be left paying the entire mortgage on their own. In some cases, this financial burden will be too much and lead to foreclosure.
A foreclosure has the potential to ruin an individual’s credit and make it impossible for them to purchase a home in the future. In addition to financial issues, having jointly owned rental properties will require additional future interaction with an ex-spouse.
If the parties did not get along, it may not be a positive experience for them to try and communicate regularly regarding a rental property.
Should I Seek Financial Advice?
Yes, it is essential to seek financial advice from a financial professional or a financial services lawyer regarding rental property in a divorce. A financial lawyer or other financial professional can help an individual make their financial plan as well as discuss the implications of keeping or selling a rental property.
Should I Consult with an Attorney?
There is no right or wrong decision when it comes to keeping your rental property during your divorce, it is simply what is best for your situation at the time. Consulting with a family law attorney who can help you make an informed decision is the best step you can take for yourself and your future.
Your attorney can help you draft an agreement regarding the rental property. Should any issues arise in the future, your attorney can also represent you in court to get them resolved.
