When a divorcing couple has invested in income-producing real estate, it is often a key asset to be addressed by the court. When disputes arise or valuation issues occur, a family law attorney with Joseph Hollander & Craft may be able to help you reach a productive resolution.
Does the Court Treat a Rental Property Like a Home?
Both Kansas and Missouri draw a distinction between real property that serves as the couple’s personal residence and rental properties that are maintained as a source of income. While both have value, rental properties also have a cash flow component. Because of this, valuation of rental properties often includes an assessment of both its liquidation value as well as its income potential.
The income from a rental property can have an impact on both asset division as well as spousal support decisions. Missouri divorce laws are based on the principle of equitable division. This means that marital property is divided with weight given to considerations like the length of the marriage, both spouses’ contributions to the marriage, as well as the value of assets owned together. In practical terms, this means that, if a rental property generates significant income throughout the year, it may impact the amount that you or your spouse should expect to receive in alimony, child support, or the divorce settlement overall.
What If I Owned the Rental Before the Marriage?
Property acquired during the marriage is presumed to be shared property under Missouri law. The court may therefore require you to share the value of the property with your spouse during divorce proceedings. Exceptions can exist if the property was purchased or inherited prior to the start of the marriage, or with a premarital agreement.
However, even these carve-outs are not set in stone. If your spouse contributed to mortgage payments, or made significant improvements to the space, or if the property has appreciated significantly in value, what might otherwise be considered separate property may be converted into marital property in the eyes of a family law judge.
Determining a Rental Property’s Value
The three most common valuation methods for rentals in Missouri include:
- Market comparables: The market approach involves taking stock of similarly sized and located rentals in the area. Market comp factors can include the condition of the property, its amenities, its rental history, as well as a valuation based on other homes located nearby.
- Cost: Some rentals are time-shares, vacation homes, or are only used part of the year to generate income. In these cases, a cost-based valuation may be useful. Cost appraisals account for the expense to replace an existing rental with a similar one. It might include building expenses and depreciation, and tends to be used in instances where a rental property is particularly unique or located off the grid, such as a family hunting cabin or lodge.
- Income capitalization: This approach focuses on the rental’s ability to generate income. Income capitalization is particularly popular around Kansas City, St. Louis, and the Ozark region. Vacation rentals tend to be subject to higher income capitalization accounting because they can see higher turnover and more traffic than a family home rental.
Repairs, maintenance and upkeep costs should all be included when determining a rental property’s value. Debts and liens also impact the value of your rental property, and should be accounted for in the overall appraisal. Failing to do so can lead to you paying too much in spousal support or an unfair overall settlement.
Can I Keep the Rental Property After Divorce?
If one spouse wants to keep the rental property after a divorce, a buyout is one of the most common solutions. The spouse that wants to keep the property essentially purchases his or her spouse’s share of the property, typically based on its appraised value minus any outstanding mortgage.
Consider the following example: A rental home is worth $300,000 and has a $100,000 mortgage. Therefore, there is $200,000 in equity. In most cases, each spouse would be entitled to half of the equity, or $100,000. To keep the property, one spouse would need to pay the other spouse $100,000. This can be done with cash or, more commonly, by agreeing to the distribution of assets of equivalent value as part of a property settlement. Options might include:
- Retirement accounts (401(k), IRA, pensions)
- Equity in the marital home
- Investment accounts
- Vehicles or other property
Dividing Multiple Properties
Forced sales of rental properties can be costly, time-consuming, and may result in you losing money. A Kansas City family law attorney from Joseph, Hollander & Craft can guide you through a number of different options, including asset swaps, staggered sales, or joint ownership. For instance, rather than selling all properties and splitting the proceeds, you and your spouse could agree to each take one or more properties of relatively equal value.
Appraisals and updated mortgage statements can be essential in determining fair division of assets. If one property is more valuable or has better cash flow, it may need to be balanced with additional assets or a partial buyout.
Can We Co-Own a Rental Property After Divorce?
Yes, you can. A written agreement can help account for details such as rent collection dates, upkeep expenses, and sale timelines.
Leases, Tenants, and Day-to-Day Management
A written agreement can also help divorcing spouses keep track of what happens to existing leases when the property changes hands. Prepaid rent and maintenance obligations should both be included in valuation for rental properties.
Tax Considerations in Property Division
Depreciation recapture can take a serious toll on rental properties in Missouri. With depreciation recapture, the IRS may tax rental income as ordinary income rather than at the capital gain rate after a transfer of ownership. Both spouses will need to keep careful records in order to accurately account for depreciation recapture on rental property after a divorce. A 1031 exchange may be able to help defer capital gains taxes.
Disputes Over Rental Income
Rental income should be reported on tax returns and verifiable via several kinds of documentation. Bank records, leases, mortgage payments, and more all leave a paper trail showing a rental property’s true value.
Dealing with underreported or hidden rental income during a divorce can be stressful, especially when the outcome affects both your own future and also your children’s stability. The discovery process and the assistance of a forensic accountant can help uncover a rental’s true value.
Contact Our Kansas City Divorce Attorneys for Help
Joseph, Hollander & Craft can assist you every step of the way with the details involved in dividing rental property during a divorce. We maintain offices in Kansas City, Lawrence, Overland Park, Topeka and Wichita to serve clients throughout Kansas and Missouri. Contact us today.
