Should I Keep or Sell My Investment Property Post-Divorce?
When it comes to dividing assets during divorce, investment properties can create a unique set of challenges—and opportunities. Whether you’re dealing with a vacation rental in Scottsdale, a multi-family unit in Tempe, or a long-term rental in Phoenix, deciding whether to keep or sell that property post-divorce involves financial, legal, and emotional considerations.
In this post, we’ll explore everything Arizona divorcing homeowners need to know about investment properties, including valuation, tax implications, ownership options, and tips for maximizing your financial outcome.
Read on, and check out our YouTube video here.
What Makes Investment Property Different from the Marital Home?
While your primary residence is often tied to emotions and daily life, investment properties are assets meant to generate income or grow equity. That distinction matters.
During a divorce:
The marital home is often the first asset discussed because one party usually wants to remain in it.
Investment properties are treated more like business assets—they’re evaluated based on income potential, liabilities, and market value.
Courts may take a different approach to dividing these properties, especially if only one spouse managed or invested in them.
Arizona Property Division Laws and Investment Real Estate
Arizona is a community property state, meaning that most assets (including investment property) acquired during the marriage are considered jointly owned—regardless of who is on title.
However, complications arise if:
One spouse owned the property before marriage (it may be separate property).
One spouse contributed separate funds to the down payment or improvements (tracing is required).
The property was held in an LLC or trust.
If you're unsure how your investment property will be handled, a real estate expert with divorce experience can help untangle ownership and valuation.
Option 1: Selling the Investment Property
If both parties agree, selling the investment property and splitting the net proceeds is often the cleanest option. This avoids future entanglements and gives each party liquidity for their next chapter.
Pros:
Immediate financial split
No need to refinance or retitle
Avoids ongoing joint ownership or disputes
Cons:
May trigger capital gains taxes
Loss of potential future rental income or appreciation
Arizona Note:
In 2024, capital gains tax rates remain favorable compared to other states. However, Arizona does tax capital gains as regular income, which should be considered in your settlement planning.
Option 2: One Spouse Keeps the Property
This is common if one party was already managing the rental, or if the property is tied to a business or future retirement plan.
Steps to Take:
Get a current market valuation from an appraiser or experienced real estate professional.
Determine equity (fair market value minus mortgage balance).
Negotiate a buyout, where one party receives other assets or a lump-sum payment in exchange for their share.
Retitle the property and refinance the mortgage, if needed.
Important:
Don’t sign a quitclaim deed until you’re released from the mortgage.
Consider using a warranty deed instead for better long-term protection.
Option 3: Co-Ownership After Divorce
Co-owning a rental property with your ex may sound awkward, but in some cases, it’s financially strategic. This can be a short-term solution if neither party wants to sell immediately, especially in a rising market.
Must-Have Protections:
A written agreement outlining responsibilities, repair costs, and income distribution
Defined exit strategy (e.g., sell after 2 years, buyout terms, dispute resolution)
This arrangement is more common in high-value properties or multi-family units generating steady cash flow.
Tax Implications of Keeping vs. Selling
Selling an investment property may result in:
Capital Gains Taxes: Based on appreciation during ownership
Depreciation Recapture: Taxed as ordinary income
Keeping the property may mean:
Ongoing income taxes on rental profits
Continued depreciation deductions (if structured properly)
Arizona Insight: If you’ve owned the property jointly and depreciated it on your taxes, both parties should consult a tax professional to avoid IRS scrutiny in future returns.
Real Example from Scottsdale
A couple jointly owned a short-term rental near Old Town Scottsdale. The husband wanted to sell, the wife wanted to keep it. We arranged for a certified appraisal and profit/loss review for the past 3 years. Using that data, the wife refinanced the property, bought out her husband's interest, and continued managing the property. Their settlement included a clause that if she sold within 3 years, he’d receive a percentage of appreciation—a fair and creative compromise.
Questions to Ask Before Deciding
Can I afford to manage the property alone?
What are the current and projected rental yields?
What will capital gains taxes look like if I sell?
Do I need the equity from this property to buy a new home?
How will this asset impact my credit or DTI?
Tips for a Smooth Transition
Involve professionals: Real estate agents, attorneys, CPAs, and mortgage brokers should all be part of the process.
Keep records: Rental income, expenses, and ownership documents will all be needed.
Understand your options: Don’t be pressured into keeping or selling without full clarity.
Watch the market: In Arizona, real estate trends can change rapidly. Timing matters.
Final Thoughts: Think Strategically, Not Emotionally
Dividing investment properties in divorce isn’t just about what you “want”—it’s about what makes the most financial sense for your future. If you’re considering keeping or selling an investment property, let’s review your options together.
📞 Call, text, or email me today. I’ll guide you through every step, help assess property value, connect you with lenders, and ensure that your real estate decisions support your long-term stability and financial freedom.
Let’s make the smart move—together.