Property division, especially when it involves the marital home, can be a hotly contested aspect of a divorce.
But what if a couple has one or more rental properties? How the property is split is a matter for divorce courts. Legally speaking, divorcing couples can co own rental property, but is it wise for them to do so?
We asked a few California family attorneys for their thoughts.
Scott Finkbeiner - San Diego Family Lawyer
If you own a rental property with your spouse and each party has a one-half interest in the same, then there are numerous options during the divorce and post-divorce. While the divorce is pending, and as long as the rents cover the mortgage, property taxes, insurance, maintenance, etc…, the parties would split the income equally.
Pending the final judgment, if a spouse refuses to split the rental income (after expenses), then you can file a motion with the family court seeking the division of the rents equally. During the divorce, the parties will need to have the rental property appraised to determine its fair market value. If there is equity in the rental (i.e. fmv – mortgage debt), then either spouse can attempt to purchase the rental from the other spouse by paying one-half of the equity position.
The spouse desiring to purchase the property will need to refinance the residence and remove the other spouse from the loan. If this is not an option, then it is best to sell the property.
Generally, jointly owning assets with your former-spouse is never a good idea.
Nicole Aeschleman - San Jose Family Attorney
They (divorcing couples) can do whatever they want. They can continue to hold a property as co-tenants and share the rental income, sometimes until a set time for a future sale of the property. They can sell the property and divide the proceeds as appropriate immediately.
Tax Implications Should You Decide to Keep Rental Property
The rules are pretty simple for rental income taxes. If you own 50 percent of the property, you report 50 percent of the income and can deduct 50 percent of the expenses. Unless you're a real estate professional, as defined by the IRS, you report your share of rental income and expenses on Schedule E. If you are actively involved in managing the property - rather than hiring a management company, you may be able to deduct up to $25,000 from other income.
You are also eligible to deduct depreciation of the home's value, requesite to your percentage of ownership.
The Short Answer
If you and your former spouse are on good terms, co owning a property may work. However, depending on the state of the market, it is usually in your best interests to sell the property and be done with it.