Divorce and your real estate portfolio
How Real Estate Assets Are Impacted During a Divorce
Real estate is a popular focus of investors who want to implement a long-term wealth building technique with their portfolios. There were more than 630,000 divorces in 2020, all of which involved asset division. If your investment portfolio contains real estate properties, you should know how a divorce will affect your holdings.
Understanding the Difference Between Marital and Premarital Property
When you seek a divorce, all of your marital assets will be divided. New Jersey is an equitable distribution state, which means that, unless you and your estranged spouse have come to an agreement, these assets will be divided by the judge in a manner that’s considered fair but not necessarily equally. The only way that assets can be divided is by identifying the value of the property in question. Realtors can perform these types of valuations.
The value of an asset that’s useful to divorcing spouses is the equity. A home’s equity is the difference between its market value and the amount of money that’s still owed on the property. If you bought a $400,000 property with a $350,000 loan and have since paid off $200,000 of this loan, your equity would amount to $250,000. This amount would likely be divided during divorce proceedings.
If a piece of property is distributed to just one spouse, the other spouse would need to be compensated for their share of the equity. It’s also essential to identify how much of the equity is considered a marital asset or a premarital asset. There are several different types of premarital assets.
A premarital asset is any asset that’s obtained before marriage. However, if the asset was purchased with a loan that was eventually paid off during your marriage, the asset might only have partial premarital value. If a specific asset was excluded because of a prenuptial agreement, it can’t be part of your marital assets. Some other types of premarital or nonmarital property include:
- Personal injury settlements
- Awards from lawsuits
- Gifts to one spouse
However, different rules will apply in the event of commingling.
How Real Estate Assets Are Protected During a Divorce
Finding out how to divide assets can be a challenging process depending on how much the spouses disagree with each other. There are also times when one spouse will give up an asset without knowing its true value.
During divorce proceedings, most assets must be labeled with a specific value to ensure that they’re fairly divided between each spouse. When appraising property values, the different tax rules pertaining to retirement accounts and investments might come into play.
Divorce proceedings can become costly if spouses go to battle over every item or piece of property that’s part of the marital estate. During this time, legal and other professional expenses can build up. If the value for each item is determined before assets are divided, it should be easier to make decisions about who gets what. If the case goes to court, one spouse may need to provide evidence to support their claims on the status of marital or nonmarital property.
Not all divorces need to be contentious. It’s possible for one spouse to better protect their real estate portfolio by obtaining the services of a third-party mediator. A mediator can be used before a case goes to court if both spouses are relatively amicable with one another. After negotiations with the mediator, both parties can sign an agreement that recommends to the judge how all assets will be divided and how other aspects of the divorce will be handled.
When you need help with dividing assets and protecting your real estate portfolio, get in touch with our New Jersey divorce lawyer. We can take a look at your case and assist you in managing all aspects of your divorce. You can also learn how the divorce process works and what the steps usually involve.
Using an LLC or a Revocable Trust to Protect Assets
There are two methods that people regularly use when attempting to protect their assets, which include creating an LLC
or setting up a revocable trust. An LLC is a type of business entity in which the owner isn’t directly responsible for any of the company’s liabilities. There’s a difference between the company’s property and the owner’s property.
An LLC is able to protect its assets by having them transferred directly to the company. The court then treats the company and all assets as separate property. If, however, the property is commingled with marital property, the company itself will be turned into a joint asset that will be divided during the divorce.
There are also times when a revocable trust is used to protect assets from a divorce. This type of trust is one in which all the terms of an agreement can be canceled or altered by the grantor. The income that’s earned from the collective assets is eventually provided to the grantor. Any property that is held within this trust will transfer to the named beneficiary when the grantor passes away.
When this type of trust is established, ownership of assets is transferred to the trust, which means that income from the properties belongs to the trust as well. In order to do so properly, the assets that are placed in the trust need to be retitled in the trust’s name. This is a very important step that is often overlooked.
Keep in mind, however, that revocable trusts don’t always produce the intended results. In the event that the property was purchased before the marriage occurred, the trust may protect it. The same is true if any income that was earned from the property within the trust isn’t commingled directly with marital funds. Doing so would result in the trust being placed into marital assets, which would be divided in the divorce settlement.
There are also times when a divorcing spouse incorrectly drafts the trust by portraying it as marital property within the terms and conditions. Along with a revocable trust, another type of account that can be opened for marital property is a discretionary trust. The trustee for this account has full authority over who becomes a beneficiary and when they’ll receive assets. It’s possible for the trustee to deny all access to this property during divorce proceedings.
Things to Consider When Dividing Assets
There are several ways to manage a property that contains a certain amount of equity during a divorce. For instance, both spouses can agree to list the home for sale, after which the net proceeds would be divided evenly between each spouse. These proceeds would only be divided after all tax is removed from them. It’s also possible that assets would be transferred from one spouse to the other to compensate for the equity they won’t receive.
Another option that’s commonly used is to refinance the mortgage, which allows for additional funds to be obtained from the existing equity in the house. These funds could be used to pay off the other spouse’s equitable interest. One party may choose to live in the property if they can afford the mortgage once the divorce is finalized. However, the equity that’s owed to the other spouse would need to be provided with other assets.
Both spouses may come to an agreement to sell their home at a future date. This option is commonly selected when a child is still attending school. The house would then be sold once the child turns 18. If one party wishes to remain in the residence, they could pay rent to their ex-spouse. In this scenario, the ex-spouse would retain ownership.
If you want to file for a divorce but are unsure of what will happen to your assets when you do so, call our New Jersey divorce lawyer today at (201) 343-0078 to discuss your case and find out which legal options are right for you.