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Posts: 1
Reply with quote  #1 
Hi All,

if a rental property is part of a divorce settlement, it would be logical that one party would pay the other party 1/2 of the total equity. But my wife says there should also be consideration of what the property earns...  My response was that the profit is dependent on the cost of up keep.  The house may clear $250/month for 6 months, but then need a $3000 new HVAC.  If one party wants consideration of the profit, wouldn't they also have to agree to part of the liability?   Thanks for any insight.

Posts: 3,798
Reply with quote  #2 
Keep in mind, this is my opinion.  Some may argue this division.  A judge would determine exactly how the issue is resolved.  My answer is assuming you bought the property together and neither owned it before the marriage.  If one partner brought this property into the union, previous equity is not considered in this answer. 

The equitable way to determine this is two-fold. 

You would be to have the property appraised.  You need the value of the property as it stands now.  Have it appraised by a licensed appraiser.  That will determine the value of the structure.  Deduct for deferred maintainance issues that currently need attention and any current liabilities (mortgages, liens, etc.).  This would give the current equity.  At the end, the receiving party would refinance the property into their own name (ending any mortgage liability for the other party).  The relinquishing party would receive 1/2 the present equity and would quit claim any further interest in the property. 

The future upkeep will be offset by several factors: the future appreciation if you keep the property properly maintained, future rent increases, your tax deductions for repairs and maintenance, etc.   In your example, the $250 a month is profit, the $3000 is a tax deduction that will lower your tax liability to the same amount over a period of time.  Remember, all repairs and maintenance of a rental are tax deductible.

You also will need to determine the value of the business.  Yes, rentals are a business.  Just as if you owned a company with a business partner and the partnership was dissolving, you need to do a profit and loss statement.  A company portfolio if you will, to show past and projected future earnings.  There should be a value in these to account for projected vacancies and repairs.  Local Property managers can tell you the vacancy rates in your area.  Local experienced investors should be able to set a percentage for repairs.  (Here I would allow 20% for repairs but this could vary according to costs of materials and labor in yoiur area.)  You are determining the projected loss of earnngs for the business partner who will lose ownership.  This shouldn't be projected lifetime profits, but for an agreed specified time (just as alimony is agreed upon for a set period).  It should cover a period of say 1-5 years perhaps, depending on the length of time the property was owned, the length of the union, the determined current equity in the property, the amount of income that will be lost, etc.  The relinquishing oartner would receive 1/2 the lost profit over the period.  Very subjective, I know.  Which is why judges decide these things if you can't come to an agreement amongst yourselves.  Corporate dissolution can be tough.  Marital division can be harder.  Good luck.
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