Some divorce settlements can be simpler than others to negotiate. Sometimes ownership of certain accounts or assets can provide more complexity and may require help when discussing possibilities for dividing your financials. One of those more difficult aspects is the division of rental properties.
If you and your spouse obtained any rental properties during your marriage, those properties are considered marital property and will have to be fairly divided in your divorce. Rental properties (whether residential or commercial) can make asset divisions more complicated for many reasons. We will discuss a few of those reasons below so that you can be knowledgeable and feel prepared going into your settlement negotiations.
Consider the Values
Generally, when you divide assets such as a primary residence, you only have to consider the value of the property minus any debts on the property, such as a mortgage or home equity line of credit, to determine the value of the home. If you include rental properties in your asset division, it is important to consider both the value of the property as well as the value of the income produced by renting. For example, if you and your spouse own an apartment building, you need to consider both the value of the property itself, the amount of income you receive through rent payments and any expenses of renting the property.
As is the case when you divide other assets, you could choose to either sell the property and split the profits or decide on an equitable buyout if one spouse wants to keep the property. In either of these cases, you would need to consider the added value of the income that the property generates. Additionally, you may choose to continue to own and manage the property together, which we will discuss in more depth below.
There are a number of tax considerations to make in divorce, but some of them relate directly to the sale of rental properties. If you are going to sell the properties, one tax consideration to take into account is depreciation recapture. You may have claimed a deduction on your rental properties for depreciation during the time that you owned them, but depreciation recapture would be taxable on the sale of those properties. It is important to note that there is a capital gains tax associated with rental properties, whereas there is no capital gains tax for assets such as equipment. In addition, you may want to consider converting to a primary residence for a while. This would allow you to take advantage of the primary residence tax exclusion upon sale if you meet the IRS requirements for ownership and use.
Creative Partnership Solutions
As mentioned above, some couples choose to continue to own and/or manage properties together even after they get divorced. If this many be a possibility for you, think creatively about how to own the properties as “business partners” rather than spouses. In addition to legal counsel, it may be helpful for you to talk to a financial professional to plan for how to be successful business partners post-divorce.
Hopefully, you now have a better understanding of the ways that rental properties can make asset division tricker. No matter how you choose to go about dividing (or maintaining) your rental properties in a divorce, we look forward to supporting you by making a plan that you feel confident in. Reach out today to schedule your complimentary initial consultation.