What’s it really worth?
Rental property can be a good source of income during marriage, but what happens to this asset when a couple divorces? It is frequently more complicated than you might think.
Florida law requires the equitable division of marital property. Equitable in this context means a 50-50 split unless that would be unfair under the circumstances. Often, a fair distribution does not mean drawing a line down the middle of each asset or splitting the marital estate exactly in half.
The divorcing spouses often negotiate a marital settlement agreement in which they agree on how to equitably distribute their property. It is helpful during this process to understand the applicable law as well as what a judge might do. If they do not reach agreement, the judge in the divorce must divide the marital property.
Marital v. separate property
First, it must be determined if the rental property is marital or separate property. Separate property consists of assets that a spouse owned before marriage or that they inherited or received as gifts. This is not always clear. For example, if a spouse owned rental property before marriage, it would be separate property at divorce, unless something happened during marriage to make it all or partly marital. For example, did the parties use marital funds for repairs or mortgage payments? If so, the unit could change to partial or complete marital classification.
The bottom line is that rental property classified as separate at divorce is not subject to distribution – it remains the original owner’s property. But if a rental property is partially or all marital, the marital part will be part of the marital estate subject to division.
Decisions to make
The parties should express their preferences concerning the rental property in the future, which will vary depending on whether it is residential or commercial. Does either of them want to operate the property as a rental? This would mean having the duties of a landlord like repair and maintenance, but also rental income. If it is residential, do either of them want to live there and convert it to nonrental property? Is there any reason to co-own it and continue to operate it together, dividing the income somehow or designating it for one of them to receive?
The property’s value is likely different depending on whether it stays rentable or converts to residential. If one spouse lives there, their living expenses would have to be determined and the rental income would cease.
For valuation questions, consult an appraiser or real estate broker. If it remains rental, the value of the physical property itself would need to be established along with the market rate for renting it out as a future source of income. Or, the parties could decide to just sell it and put the money into the marital estate for division.
Florida courts have wrestled with these issues, including:
- Forgetting to factor in expenses in operating rental property
- Accurately projecting future rent levels in the local market to attribute to the future owner’s income, which could affect net worth, and alimony and child support obligations
- Deciding the impact of a rental arrangement in which the couple was charging rent below market value
- And others
It is smart to enter divorce proceedings when you own rental property understanding that issues of valuation, expenses and rent can come up as well as the need to make decisions about disposition of the property. A Florida family law attorney can provide advice and guidance.