Dividing Rental Properties During a Divorce
May 1, 2023 Divorce
Rental properties are a lucrative side business for many couples. During a divorce, the division of a rental property often creates additional problems. First, you will have to consider what will happen to the rental properties; second, rental properties are often a means to accumulate additional assets and they can be a source of income to pay the bills.
The first step is for the judge to determine if the rental properties are marital property.
If you are negotiating a settlement or when your case goes to trial, you will need to determine if the rental properties are marital property or separate property. If the judge finds that the properties are separate property, then the property will generally not be divided between the two of you unless the court applies an exception to that rule. To learn more about separate property, read our explanation about separate and marital property.
Step two is to decide what you really want.
Before you consider what to do with the property, you should determine the value of the property. The best way to value the property is to obtain an appraisal. Next, of course, you will need to deduct the value of any mortgages to obtain a net value of the property. If you own more than just a few rental properties, and this is an actual business with employees, you may need to consider a business valuation that is prepared by an expert. Not every evaluation is as straightforward as obtaining the gross value and deducting the mortgage. If the property generates a monthly income, such income will likely be considered for spousal or child support issues and may be considered in the valuation of the property.
Next, you will need to decide what you want regarding the property.
Basically, you have three options: sell it and divide the proceeds, one of you keeps it and buys out the other spouse, or both of you keep it and continue operating it together.
Let’s discuss the option of keeping the property and operating it together. Although this is an option, it seldom works out, and it will create a significant headache if you belatedly decide that working together is not a good idea. Operating a business with a spouse is stressful when you have a good working relationship; logically, divorcing spouses do not have a good working relationship.
Rental properties are often managed by one spouse. Your spouse may want to keep the property as a source of income or wealth creation. If you have never been involved in the management of your spouse’s rental property business, now is not the time to start. Michigan divorce law requires an equitable division of assets, and either your spouse must pay you an equalization award for your share of the rental property’s value, or you will receive a greater share of value from another asset, for example, the marital home.
Finally, there is the option of selling the rental properties.
If one spouse is unable to pay an equalization award to buy out his or her spouse, the properties will likely be sold, and any equity will be divided between the two spouses. If two spouses cannot agree to the value of a property or if they fail to provide adequate support for the judge to determine the value of the property, the judge may order the sale of the properties. For this reason, it is beneficial to work with your attorney to provide expert testimony of the net value of your rental properties.
If you anticipate that you and your spouse will not be able to agree regarding the ownership, value, or division of the rental properties, give our divorce attorneys a call at 616-285-0808 to make an evaluation and game plan during our complimentary initial consultation.