Property division is one of the most critical aspects of a divorce, which can be complicated when a couple owns investment properties. Real estate can change radically in value over the course of a marriage. That change in value can be entirely market-based, or can be the result of management and renovation of a property. The dual issues of management of the property, and changes in a property’s value, make investment real estate a particularly tricky issue to deal with during a divorce.
Determining the value of real estate may be more difficult than valuing a car or a boat. Real property needs to be appraised, and in some divorce actions, each party will obtain his or her own appraisal, thus creating a sort of “duel of the appraisals” which can only be resolved at trial. In other cases, courts may simply order real estate to be sold and the proceeds divided between the parties.
Potential scenarios regarding the division of real estate properties
If you or your spouse purchased a real estate property before marriage, it should be considered separate property, and therefore ineligible for division during the divorce. This is true of both investment property, and a home that the spouses live in together. Much more likely, however, is that both spouses contributed in some way to the expenses or upkeep of separate property during the marriage. In this case, any increase in the value of the property from the date of the marriage – if not the value of the property as a whole – could be deemed a marital asset, and as such, subject to division.
What if the investment property contributes to the household income?
If you and your spouse purchased an investment rental property together, the earnings would be considered marital property. Interestingly, the same can likely hold true for investment properties purchased pre-marriage. This is because investment properties require management – tenants need to be dealt with, repairs need to be made. Courts see this management as a form of work. Because income earned during a marriage is marital property, this income would also be considered marital property.
Creating separate property real estate
If one spouse inherits a piece of real estate, that property will be considered separate property. So, too, would any property you obtained in exchange for another piece of separate property. You can also choose to keep certain properties separate in a prenuptial or postnuptial agreement.
It is also possible to not sell an investment property when you get divorced, so that you may both continue to use the property, or continue to make a profit from it. However, in order for this to happen, divorcing spouses must agree to keep the property in question. If this is disputed, a court will usually not order one spouse to buy out the other, and instead will order the property sold. If spouses choose to continue to co-own real estate, they will need to decide what you want to do if, in a few years, one wishes to sell.
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