The unknowns of a divorce can cause a lot of anxiety, both personally and financially. Spouses usually have a general idea of what a divorce entails, but a common question is, “What will happen to investment properties in a divorce?”
In dividing up a marital estate, the lawyers and judge are essentially trying to build a spreadsheet listing the spouses’ community assets and liabilities, while also assigning a value to those items. Once that is done, the court can then divide the estate. While this is a simple concept, it can entail a great deal of intricate work. For example, there may be disputes about the character of property – is it community or separate? There may be disputes about the value of assets. There may be a dispute about who gets a particular asset or how a specific liability is paid for.
With regards to investment properties, the court generally has two options:
- Award the property to one spouse; or
- Order the property to be sold.
Awarding the Property to One Spouse
The court has the authority in a divorce to award an investment property to one of the spouses. For example, if the parties have a rental property, the court may award that property to either spouse. In doing so, however, the court (or the jury) will need to determine the asset’s value. Why? Remember, the court will need values on all assets and liabilities before dividing the estate. If one spouse is receiving an investment property, the other spouse will have to be compensated for that spouse’s interest in that asset’s value. This can be done by awarding other marital assets, a note payment (typically secured by the investment property), or a combination of the two. The exact compensation depends on the estate’s overall division, which is an issue for the court to decide.
So how does the court determine the value of an investment property? The court can rely on the spouses’ testimony – in Texas, an owner can testify to their property’s value. See Porras v. Craig, 675 S.W.2d 503, 504 (Tex. 1984) (“the owner of the property can testify to its market value, even if he could not qualify to testify about the value of like property belonging to someone else.”) However, typically, the court relies on expert testimony in determining the value of assets. For example, the spouses may each hire (or, in some instances, jointly hire) a real estate appraiser for real property. The court (or jury) will listen to the expert testimony and use it to determine the property’s value.
Selling the Property
The court could also order community investment properties to be sold. This approach eliminates any valuation issues – the market will determine the value of the property. With this approach, the court will typically include provisions for the sale of the property, e.g., how a listing agent is chosen or how the sales price is determined. The court could even appoint a receiver to sell the property. After the sale occurs, the court will determine how the sale’s net proceeds will be divided between the spouses, again, depending on the estate’s overall division.
Community investment properties will have to be dealt with in any divorce. There are many approaches that the court can take, and the court’s decision can have a significant impact on a spouse’s financial situation. It is essential to go into a divorce with a game plan of dealing with investment properties and a strong lawyer who can advocate for that game plan.