How to Divide Marital Rental Property With No Equity

by Marilyn Lindblad

Property division in a divorce can be a simple matter of dividing furniture and personal effects, but when real estate is involved, property division may be more complex. With investment real estate, even if there is no equity, the intricacies of valuing and dividing the property complicate the analysis even further.

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Valuing the Property

Valuing your marital rental property is the first step toward dividing it. One aspect of rental value is the value of the physical assets, which includes the land and the building. For this type of valuation, a real estate appraiser or broker analyzes sales of nearby, comparable properties and uses that information to estimate the amount your rental property would bring in a transaction between a willing buyer and seller. If the mortgage debt against the property exceeds the value of the property, the house is said to have no equity.

Valuing the Investment

Rental property valuation extends beyond the equity, or lack of equity, in the real estate. For example, a positive cash flow can add value to rental property when the monthly rent is greater than the monthly cost of ownership. Other reasons to hold on to rental property can include the tax-sheltered depreciation on the property, the chance to sell the property for a profit in the future and the availability of the home for the owner's use. An accountant can assign a value to the property based on its overall benefits.

Selling the Property

One way to divide rental property that has no equity and no discernible value to either spouse is to sell it. If the sale proceeds are insufficient to pay off the mortgage balance, the couple can liquidate other marital assets until they have enough cash to pay off the mortgage balance in full. Until the house sells, the couple can divide the monthly rent receipts and any other expenses associated with ownership evenly between themselves, with each spouse receiving 50 percent of the rent and each spouse paying 50 percent of expenses.

Dividing the Property

If either the husband or wife wants to keep the rental property and can afford to keep it, one spouse can buy the other out based on the investment value that an accountant assigns to the property. For example, if the wife wants to keep the property, the couple's property settlement agreement may order her to refinance the mortgage against the property in her own name as soon as there is enough equity in the house to support a refinance. If the wife fails to make a mortgage payment and the husband has to make payments on the house to protect his credit, the settlement agreement converts those payments to a judgment against the former wife. A property settlement judgment cannot be discharged in bankruptcy, so the wife would eventually have to repay her former husband for the mortgage payments that he made.

Legal and Tax Advice

Disposition of income-generating real estate in a divorce is a complicated legal issue. The way the couple holds the property on the deed, variations in state law and changes in tax law can all affect the valuation and division of property. A divorcing couple whose marital rental property has no equity should consult with local family law attorneys and tax advisors to determine the best course of action for their particular circumstances.