Any time a couple gets divorced, lives can get incredibly complicated. Not only are liquid finances at play to be divided up in the proceedings, but even held property can be considered marital property. A couple’s real estate investment partnership is fair game in family court. Real estate investments such as rental homes, multifamily buildings, commercial spaces, and even development projects may be up for grabs. Even if the investments are solo and not joint-owned, it’s all on the table when a marriage ends.

This is a very complex issue. In real estate, it’s not just the owners who have a stake. It’s also third-party investors, renters (tenants), and companies who may be contracted. Courts look into these matters very closely, and it can take quite a while to figure out which party gets which assets. The best course of action to take is to initially seek out a qualified divorce lawyer like the attorneys at Davis & Associates to assist.

Ownership Structures and Their Implications

There are several different forms that a real estate investment partnership can take. Spouses may hold the title jointly. One party may be the majority owner, while the other has a minority stake, or even acts as a silent partner. Both names may be on the LLC paperwork. Entity structures are common for liability protection and tax matters, but these will not necessarily protect a party during a divorce.

The fact of the matter is that courts generally divide marital property equitably. Keep in mind that “equitably” is in no sense “equally.” While real estate investments can technically be split down the middle, that sort of even-handedness is typically reserved for joint-owned ventures. Courts are hesitant to disrupt the business side of ownership since real estate affects other people’s lives so directly. Tenants having to move because an ex-spouse just received a majority share and decides to sell off has real-world implications beyond profit.

In most partnership and operating agreements, transfer restrictions, buy-sell provisions, and other dos and don’ts are typically written into the contract. The court may assign responsibility and ownership but will rarely shred the contract to nullify those details.

Characterizing Marital Versus Separate Property

Whether or not your real estate holdings are considered marital property depends on when and how the property was acquired. If you owned a real estate business prior to getting married, for instance, the business itself may be safe from the “marital” label. You will still likely have to give over money commensurate with the business’s value, as that’s part of your net worth and holdings, but not a stake in the business itself.

In states like Idaho, Nevada, Texas, Washington, Wisconsin, and a few others, all assets acquired during marriage are considered community (marital) property. Even if you invested 100% of your own money and own the full share of holdings, courts in multiple states consider this property to be divided if obtained during marriage. The argument presented for the precedent is that you would not have acquired the holdings without marriage. Whether or not this is true, all that matters is that it’s the law.

Impact on Control, Management, and Third-Party Partners

Some soon-to-be-divorced couples try to hold things together and remain business partners, with equal rights, even though they’re splitting up. While this is theoretically possible, it’s so exceedingly rare that it’s almost impossible to find statistics on how often it’s successful. The truth is that one spouse always ends up fighting for a larger share and more control. Because the law allows this to happen, it’s just too tempting not to go that route. These courts are fully aware of this, and they understand the impact control has on management, tenants, and third parties.

This is why courts tend to push toward buyouts, offsets, or capital that makes up the equivalent worth of a business share. The court will certainly split up all marital property. That goes without saying. Yet they use a softer touch on real estate property and business relationships between spouses. Ironically, this makes the proceedings all the more complex.

The court wants to protect third parties here. Spouses are urged to make agreements that leave the real estate holdings as is, in terms of occupancy, licensing, contracting work, etc. Splitting things up between John and Jane Doe can seriously and negatively impact Jack Doe who has no part in the marriage.

Valuation Complexities

Another area where this gets quite complicated is in evaluating the actual property. The real estate market is in a state of constant flux. If a couple gets divorced during a downturn, the business and holdings can be worth significantly less. The court uses real estate appraisals as a baseline for valuing the property. However, it also takes into account things like debt, preferred returns, carried-interest structures, management fees, and more.

Many couples are shocked to learn that the split ends up being worth far less than expected, due to the valuation. This is yet another reason that courts prefer buyouts or other types of post-divorce agreements.

Forensic accountants and real estate valuation experts are commonly brought on to analyze financial statements, capital accounts, and legal documents. Settlements are based on entire valuations.

In Conclusion

It’s important to understand that getting a divorce will not automatically dissolve a real estate investment partnership. However, it does force a careful reallocation of various rights, responsibilities, and risks under divorce law. The success you experience depends entirely on how the ownership is structured. If it is a joint venture, you should expect to have to give up some control, rights, or to structure a buyout.

Speaking with a reliable and reputable divorce lawyer can help you reach an agreement suitable for all parties. You, your spouse, and third parties can end up with an equitable transfer without rocking the boat too much. Keep in mind also that these laws differ by state. This is an area where a qualified attorney is absolutely essential.