Buying real estate is a well-known way to invest money and develop a source of passive income. Financial advisors often suggest real estate and rental properties as a way for their clients to diversify their investments. This is often excellent advice, but following it can lead to complications if you get divorced.
If you’ve invested in the rental property market during your marriage, those properties may be considered part of your marital property. That means you’ll need to divide your rentals fairly during your divorce. Here’s what to expect from your divorce if you’re a landlord and suggestions for handling asset division without hurting your finances.
Why Owning Rental Properties May Complicate Divorce
Asset division becomes more complex as your net worth grows. Couples with significant resources are more likely to own high-value non-fungible items like businesses and real estate. These types of assets are more challenging to divide fairly because they are unique and cannot be split the way an investment account can.
Rental properties combine both of those concerns into one particularly complex unit. When you rent out a property, you enter a business relationship with your tenants because they are paying you for the right to use that property. There are several ways you may manage this business relationship as a landlord, each of which presents its own complications during a divorce:
Renting Property as a Sole Proprietor
If you’re only renting out one or two properties, you may not have a formal business structure in place. In that case, you’re operating as a sole proprietor. If so, the real estate is most likely your direct property. In a divorce, you’ll need to address the property itself and the income stream it generates when dividing your assets.
Renting Property as a Formal Business
If you’re dedicated to the rental industry, you may have created a formal business entity to manage your rentals. If you have an LLC or corporation that you use to manage your properties, the real estate is likely considered the property of that entity. In this case, the ownership of the property will remain with the company. Whoever owns the company will have the right to decide what happens to them. Ownership of the business will be determined in your split
Dividing Rental Income and Properties in Your Divorce
Regardless of how you’ve structured your rental business, you’ll need to divide it during your divorce. In California, spouses are entitled to 50% of the total marital assets, businesses and investments included. You can choose one of the following methods to divide your rentals fairly according to state law while supporting your goals for the future.
The most direct way to divide a rental property is to sell it. As a sole proprietor, if you sell the property you’re renting out, you’ll solve two issues at once. First, you’ll remove the need to address future earnings from the property. Second, you’ll convert it from a non-fungible, non-divisible asset into liquid assets that you can divide equally with your spouse. If the properties are held by your business, you can either sell or dissolve the entity to achieve the same result.
This may be the simplest solution on paper, but it may not be the best. Selling your properties might not be the right choice if you want to maintain income from them, have an emotional attachment to them, or simply don’t want to be trapped in legal and financial limbo until they sell.
In some cases, you may be able to split your rental properties with your partner. For example, if you and your spouse remain amicable, you could each retain 50% ownership in your rental company. As a result, you’d both have the right to half of the profits. However, you would remain financially entangled with your spouse after your divorce, which may not appeal.
If you own more than one rental, you could divide the properties. This solution works best if there is a way to split the properties that give both parties roughly equal equity and projected monthly income. If that’s not possible, the issue of how to find an equal split of assets remains.
Buying Out Your Spouse
Finally, you may choose to buy out your spouse’s share of the rentals. In this case, you’ll offer your partner assets from your share of the joint property. The amount you offer should be equivalent to half of the value of the property or your overall rental business. It should also take into account the value of the projected future income the rental property would generate.
This can be an excellent way to retain full ownership over the rentals you’ve worked so hard to maintain. You can also offer a buy-out to cover differences in value if you’re splitting multiple properties. However, it can take significant research and negotiation to achieve a buy-out agreement that satisfies both of you. It would be best if you worked closely with experienced legal counsel, accountants, and appraisers to ensure you reach a settlement that’s fair to both of you.
Handle Rental Property in Your Divorce With Expert Legal Counsel
If you own rental properties, your divorce is likely to take more time and effort to complete. That’s why it’s in your best interest to work with an experienced high net worth divorce attorney like those at Kaspar & Lugay, LLP. Our Marin Country lawyers have years of experience helping clients like you achieve the best possible outcome from their divorces. We will work with you to identify your financial goals for your split, advocate on your behalf during negotiation and litigation, and provide dedicated support throughout the process. Schedule your consultation today to learn more about how we are prepared to help you navigate your divorce as a landlord.