If you are going through or considering a divorce in Colorado, you may be wondering how rental properties will be divided between you and your spouse. To understand how rental properties are divided, you must understand a few basic principles about Colorado divorces. The first principle is the understanding that Colorado is an “equitable” division state. The second principle is that Colorado divorces only divide “marital” property and cannot divide “separate” property. Once these two principles are understood, we can then discuss how rental properties are divided in a Colorado divorce.
What is an “Equitable” Division State?
In a Colorado divorce, property division must be made in an equitable manner. The simplest way to describe “equitable” division is that martial property must be divided fairly, but not necessarily equally (50/50). Therefore, it would wrong to assume that the property and debt will be divided 50/50 between the two spouses. Because Colorado courts divide a marital estate equitably or fairly, it is not uncommon for a court to divide the property unevenly.
What is the Difference Between “Marital” and “Separate” Property
In a Colorado divorce proceeding, the court may only divide “marital” property. Consequently, there is great importance placed on the distinctions between marital and separate (nonmarital) property.
Generally, all property acquired by either spouse after the date of marriage and prior to the divorce decree is considered marital property, regardless of title. The following exceptions are considered separate property:
- Property acquired by gift, bequest, devise, or descent
- Property acquired in exchange for property acquired prior to the marriage or in exchange for property acquired by gift, bequest, devise, or descent
- Property excluded by valid written agreement between the parties, such as a prenuptial agreement
If property was acquired prior to the marriage but increased in value during the marriage, the property will have both a marital component and a separate (nonmarital) component. The separate component will be the value at the time the parties married one another with the marital component being the increase in value over the life of the marriage.
For example, if one spouse had a rental property that was valued at $300,000 on the day of marriage and subsequently was worth $500,000 on the date of divorce, the separate value is $300,000 and the marital value is $200,000. When valuing rental properties, Colorado courts will not only consider the actual value of the property but also any liens/mortgages against the property (commonly referred to as the net equity of the property).
When valuing rental properties, the court may also look to the “cash flow” of the property. For example, a property that has a long-term tenant may be more valuable than a property that is sitting empty. This is especially true if the rental property is commercial. These unique issues can be the source of complex litigation, which highlights the importance of having an attorney experienced in working with rental properties.
How are Rental Properties Divided in a Colorado Divorce?
When dividing property in a Colorado divorce, the court must follow a three-step process. Step 1 is to identify what is and is not considered to be “property.” In Step 2, the court determines which items are marital and separate property, setting aside each party’s respective separate property. Finally in Step 3, the court divides up the marital property considering all relevant factors to ensure an equitable result.
- Step 1: Rental properties are generally considered “property.”
- Step 2: To value the rental property, the court will look to the overall value of the property on the day of marriage and on the day of divorce. The value on the day of marriage is usually considered separate property while any increase in value of the account between the day of marriage and the day of the divorce is considered marital property. In some cases, parties will hire an appraiser to perform expert valuations on the rental property both at the time of the marriage and at the time of the divorce.
- Step 3: Once the court decides what is marital property, the court will divide the marital property on an equitable basis after taking into consideration “all relevant factors.” It is important to note that Colorado is a “no-fault” state, which means that the court cannot consider marital misconduct, such as infidelity, when dividing property. “All relevant factors” include but are not limited to:
- The contribution of each spouse to the acquisition of the marital property, including the contribution of a spouse as homemaker;
- The value of the property set apart to each spouse;
- The economic circumstances of each spouse at the time the division of property is to become effective, including the desirability of awarding the family home or the right to live therein for reasonable periods to the spouse with whom any children reside the majority of the time; and
- Any increases or decreases in the value of the separate property of the spouse during the marriage or the depletion of the separate property for marital purposes.
Once all of the relevant factors are considered, the court will then decide how to divide the rental property. Even if the rental property has a positive cash flow, courts rarely allow a rental property to remain a joint venture and will typically award the property solely to one party or the other. In order to keep that property, the person awarded the rental property may have to refinance the property to take the other party’s name off of the loan.
If you’re considering divorce, contact Burnham Law and put your trust in our experienced and knowledgeable hands. With our help, you can transition into this new chapter of life with peace of mind, knowing that your interests are being represented.