By Suzanne Griffiths and Culver Van Der Jagt
According to the New York Times, more American women are living without a husband rather than with one for probably the first time in our history, with the possible exception of major wartime mobilizations. Specifically, Times analysts indicate that in 2005, 51 percent of women said they were living without a spouse, up from 35 percent in 1950 and 49 percent in the year 2000. (Report on January 16, 2007). In addition, the analysts concluded that, on average, Americans spends more than half of their adult lives outside of marriage.
Marriage is probably the biggest business partnership that a person embarks on in an entire lifetime. So, you are a real estate investor who has fallen in love or out of love. What next?
Impact of a new "partnership" on a real estate investment portfolio
What is the downside of getting married for a real estate investor who has an established portfolio? Generally, the investor remains personally liable for each mortgage and takes the hit for any reduction in the value of the real estate after the marriage. In the normal situation, if there is an increase in the value of the real estate, that investor generally enjoys the increase in equity. In a marriage relationship, the “partner” is entitled to share an equitable portion of the gains (usually half), but does not have to contribute the capital or accept risk for the premarital obligations.
Treatment of premarital property appreciation during the marriage
In Colorado, generally speaking, the non-investor spouse reaps the benefits of any premarital property gains during the marriage, while the non-investor spouse is not at risk for the losses in the value or the equity. This means that the investor is typically on the hook to creditors for all of the expenses of the property, which may be paid from marital earnings, but any appreciation on that property belongs to the marriage and must be shared.
Treatment of marital property gains and losses
Property purchased during the duration of the marriage is generally considered marital property. For marital property, regardless of who is on title or on the note, both partners generally enjoy the gains and losses as a credit to or debit against the total marital estate.
Gifting to the marriage: Should you title real estate jointly?
If you own that premarital red Ferrari and the downtown loft, DO NOT TITLE THEM JOINTLY with your spouse or use the sale proceeds to purchase a jointly-titled asset. All assets that are jointly titled are considered gifted to the marriage. These are treated as marital property and could wind up in your spouse’s column in the division of assets.
Not all assets are equal in a divorce
So, you have sold your hard-earned premarital property, paid the recapture and capital gains taxes, and reflected the profit on your tax return. You used the after-tax proceeds to purchase that dream home for a million dollars and you titled it jointly. You have established a real estate portfolio, have two children with your stay-at-home spouse, and manage to keep a full-time job to support the entire family. You have done everything in your power to keep the marriage steady, but partly because of your long hours, your spouse cheats on you! You are so upset that you decide to file for divorce. What does the legal process buy you?
Because Colorado is a no-fault state, the judge is simply not interested in who cheated on whom. The judge only wants to know how the assets and liabilities should be split. Since you are the provider with the regular income, you will have to pay child support and in all likelihood spousal maintenance as well. What you don’t anticipate is that the stay-at-home spouse will probably end up with the house, continue to be the primary parent, and you will wind up with the real estate portfolio and your job.
The stay-at-home spouse is usually allocated the house, essentially a tax-free asset. The real estate investor is allocated the business properties. Courts do not allow deductions for real estate commissions, selling costs, taxable capital gains, closing costs, prepayment penalties, or any other associated costs related to your portfolio of real estate, unless you are actually selling the assets and incurring those expenses. The costs are considered to be too speculative to deduct against the real estate investments. In real terms, the spouse who receives the family home is getting much more net equity than the real estate investor who receives heavily tax-laden assets.
That doesn’t sound fair does it? Who said that there is fairness in divorce litigation?
What options are there?
Real estate investors with significant assets should strongly consider a premarital agreement prior to marriage. This step should protect against claims for appreciation on separate assets, provided it is carefully drafted by competent legal counsel. Premarital agreements are risky documents because they are often contested in divorce cases. No agreement can protect against spousal maintenance claims. If the poorer/dependent spouse is unable to support himself or herself, a maintenance claim can always be made, whether or not there is a premarital agreement. Either way, separate/premarital/inherited assets should remain titled in the investor’s name and never commingled with marital assets.
The bottom line is that a hard working real estate investor can be financially devastated by claims against appreciated assets and spousal maintenance demands, while individually bearing sole responsibility for a reduction in the value of their premarital assets under Colorado law. Marrying a spouse with significant premarital/inherited assets can be a windfall for the spouse who has no assets, because the poorer spouse can reap any and all the benefits without taking much financial risk.
This fact may be one of the reasons why the New York Times statisticians are seeing a reversal in the marriage trends. Colorado real estate investors are trained at assessing calculated risks in their business activities, but need to use their skills in determining marriage risks that impact their business activities. Under the current laws of this state, the consequences of a badly-considered marriage partnership can be devastating, which means that careful planning is essential before tying the knot.
