Dividing Airbnb and Short-Term Rental Properties in a Los Angeles Divorce
Short-term rental properties (like those listed on Airbnb) have become a significant asset for many California couples, especially in high-demand areas like Los Angeles. STR properties can generate substantial income but also pose unique challenges when spouses divorce. Determining how to classify, value, and divide an Airbnb or vacation rental in a divorce requires careful legal and financial analysis.
Below, we explore key considerations under California (and Los Angeles) law, including whether the property is community or separate property, how fluctuating rental income is handled, tax consequences, valuation difficulties, co-ownership options after divorce, and effective strategies for fair division.
Practical tips and relevant case law are included to help navigate these complex issues, but every case is unique and readers should consult with their own attorneys, financial advisors, and tax professionals to better understand how different laws, rules, and regulations apply to their specific circumstances.
Legal Classification: Community vs. Separate Property
The first step for divorcing Los Angeles couples is to determine whether a short-term rental property is community or separate property. California is a community property state, meaning assets acquired during the marriage are generally presumed to be owned equally by both spouses.
Key points include:
Acquisition Timing: If the rental property was purchased during the marriage with marital funds, it likely is community property subject to 50/50 division. By contrast, if one spouse owned the property before marriage (or acquired it by gift or inheritance during the marriage), it is typically that spouse’s separate property. Separate property is not usually divided in divorce although there may be credits or reimbursements regarding the property
Title vs. Funding: Don’t assume that the name on the deed decides ownership. Even if the property is only titled in one spouse’s name, that does not automatically make the asset that person’s separate property . The California Family Code protects party’s rights beyond what is written on title
Community Contributions to Separate Property: If a short-term rental started as one spouse’s separate property but community assets were used to pay towards the principal or home improvements, the community may gain a financial stake in the property. California uses the Moore/Marsden formula to calculate the community’s proportional interest in a separate property that was paid down or enhanced with community funds. In essence, the spouse who doesn’t own the property may be entitled to reimbursement or a percentage of the appreciation attributable to marital contributions. For example, if a spouse owned a Los Angeles rental condo before marriage but the couple used joint earnings to remodel it or reduce the loan principal, a portion of that condo’s value may now be considered community property.
Maintaining Separate Character: If a rental property was owned before marriage and remained “self-sustaining” (meaning its rents paid its expenses without using marital funds), it will likely remain entirely the owning spouse’s separate property. Careful accounting is needed to show no commingling of marital funds occurred. On the other hand, mixing finances (like depositing rental income into a joint account or using community money for repairs) can transmute (i.e. change) part of a separate asset into community property.
Transmutation Agreements: Spouses can also explicitly agree to change (transmute) a property’s status via a valid written agreement. For instance, a prenuptial or postnuptial agreement might designate an Airbnb property as one party’s separate asset regardless of timing. Absent such an agreement, courts will look at the facts of acquisition and maintenance to classify the asset.
Tip: Gather documentation on when and how the property was acquired and funded. Mortgage statements, deeds, improvement records, and bank statements will help establish whether the rental is community or separate. In contentious cases, a forensic accountant may trace funds to determine any community share. Proper classification is critical because community property is usually divided equally, whereas separate property remains with its separate owner.
Income Fluctuation: Impact of Irregular Airbnb Income
Unlike a steady paycheck, short-term rental income can vary widely month to month. Los Angeles Airbnb hosts might see surges during peak tourist season or around the Oscars, but a slow-down in off-months. This irregular income can complicate both property division and support calculations in a divorce:
Community Income During Marriage: If the Airbnb property is community property (or treated as such), then any rental income earned during the marriage is community income that needs to be accounted for in the division. Couples should disclose all earnings from the rental. While the divorce is pending, a court may issue temporary orders on how rental income is used or shared.
Valuing an Income-Producing Asset: Fluctuating income makes it tricky to value the rental for division. Court, forensic accountants and appraisers typically look at past financial records to gauge average income. For a volatile short-term rental, a multi-year average or an analysis of occupancy rates and nightly rates may be used to estimate annual income. Extreme variability (for example, if a big event like the 2028 Olympics or wildfires affect bookings) will be considered when determining a fair value.
Spousal or Child Support: The unpredictability of Airbnb income also affects support determinations. California law counts income from all sources when setting spousal or child support, but when rental income is inconsistent, courts have discretion in how to account for it. Notably, in Marriage of Deluca (2020), a California court held that judges have the discretion to exclude the portion of rental income used to pay a property’s mortgage principal when calculating spousal support, to avoid overestimating available cash flow. This allows courts to deduct mortgage expenses from income, so rental property owners aren’t penalized due to legitimate debt service. On the flip side, courts can also disregard such deductions if they suspect a spouse deliberately increased mortgage payments to suppress support.
Seasonality and Demand Changes: Los Angeles’s short-term rental market is heavily influenced by tourism seasons, local events, and competition. A property’s income in summer might be double its winter income. Additionally, new competitors or changes in travel trends can swing profits. A valuation or support order will consider historical income and the “totality of the circumstances,” possibly averaging high and low seasons. It’s wise to present the court with detailed booking and revenue records over time to illustrate these cycles.
Bonus Schedule, also referred to as an Ostler-Smith Order: Some courts will set child support and spousal support using each party’s base income, but also put an order in place to capture additional income after it is earned. This is also known as an Ostler-Smith Order. Whether it’s bonus, commissions, seasonal income, etc., any income in excess of the base salary will be calculated, generally once or twice a year, to determine if there is additional support that must be paid based on the additional income earned.
Regulatory Impacts: Local regulations can suddenly limit or expand landlord’s and hosts’ ability to earn. For instance, if a city or community imposes a 120-night cap on rentals or a 30-day minimum rental period, future income might drop regardless of demand. Such external factors are relevant in both negotiating a settlement and litigating the division, as they add uncertainty to projections of future income.
Tip: Divorcing persons who desire to keep a property and who will rely on its rental income should keep a detailed financial history of the rental including monthly income, expenses, vacancy rates, and any extraordinary events that affected earnings (e.g., renovation downtime or law changes). Both parties should be realistic that short-term rental income is not as predictable as a long-term lease, which may warrant a more conservative valuation of the asset.
Tax Implications: Capital Gains, Rental Income, and Deductions
Property division in divorce doesn’t happen in a tax vacuum. Short-term rental properties carry important tax considerations that divorcing spouses in California must keep in mind and discuss further with their tax professionals include:
Capital Gains on Sale: If the decision is made to sell the Airbnb property as part of the divorce, capital gains tax could be a major factor. Couples selling a primary residence can exclude up to $500,000 of gain (if they meet ownership and occupancy tests), but rental properties often do not qualify for this full exclusion. It’s crucial to account for built-in gains and potential tax liability when negotiating a buyout or division.
No Step-Up in Basis: Transfers of property between spouses as part of a divorce settlement are generally tax-free (no immediate tax is triggered under IRS Code §1041). However, the receiving spouse inherits the original cost basis of the asset. This means the divorce itself doesn’t create a taxable event, but it also doesn’t reset the asset’s tax basis. If a short-term rental was bought years ago for $300,000 and is now worth $1,000,000, a spouse who takes sole ownership in the divorce takes on that $700,000 unrealized gain (and potentially even more if the property was depreciated). Upon an eventual sale, and barring a tax deferral strategy such as a 1031 exchange, the IRS will expect capital gains tax on the gain on sale. Spouses should factor in potential capital gains taxes when valuing the property in the divorce – an asset worth $1M gross might effectively be worth much less after taxes. Divorce attorneys can negotiate a tax discount in a property buy out or require the retaining spouse to refinance or indemnify the other if taxes come due.
Rental Income and Deductions: For tax purposes, rental income is taxable to whoever owns the property (or split between owners). In the year of divorce, spouses might need to allocate the year’s rental income and related deductions (like mortgage interest, property taxes, depreciation, repairs) between them according to who receives the income under the divorce agreement. After divorce, the spouse who keeps the property will typically report all rental income (and can take all deductions). Additionally, keep in mind that Los Angeles County and many cities impose Transient Occupancy Taxes (TOT) on short-term rentals. If both spouses jointly operated the rental, ensure any owed TOT or local taxes up to the date of separation are accounted for.
Depreciation and Recapture: Rental property owners may take depreciation deductions each year, which reduce taxable rental income. When the property is transferred in divorce, depreciation continues with the original schedule for the new owner spouse. If the property is eventually sold, depreciation taken during ownership may be “recaptured” and taxed.
NOTE: business deductions that are permissible for tax purposes are not all recognized when it comes to income available for support and may need to be added back in to calculate support.
Tip: Always consult a qualified tax professional during property division negotiations. They can project the tax consequences of various settlement scenarios. Divorcing spouses should consider including terms in their divorce agreement that address tax issues and equalizing the division for taxes. Proactively managing these tax details will prevent unpleasant surprises from the IRS and California Franchise Tax Board down the road. Shayan Family Law, APC has developed a network of experts and professionals that can help with such analyses.
Accounting and Valuation: Challenges in Assessing Fair Market Value
Valuing a short-term rental property for divorce is more complex than valuing a home that is a primary residence. An Airbnb or vacation rental has aspects of both real estate and an ongoing business, which raises unique challenges:
1. Real Estate Market Value vs. Business Value: At baseline, the property has a market value like any other real estate (what it could sell for on the open market, considering location, size, condition, etc.). But if it’s consistently used as a short-term rental, there may be additional “business” value – e.g. an established Airbnb listing with dozens of positive reviews, future bookings on the calendar, a track record of income, and perhaps furnishings or a brand associated with the rental. On the other hand, it could also mean higher wear-and-tear and regulatory constraints compared to an ordinary home. Appraising such a property requires looking at both angles. A professional appraiser or forensic accountant might use income-based valuation methods (like a rental income capitalization approach) alongside traditional comparable sales. They must consider not only what the property’s physical structure is worth, but also the value of its rental income stream and goodwill (if any).
2. Income Volatility and Projections: Short-term rental income can be irregular. Predicting future income involves uncertainties that complicate valuation. For instance, a buyer of such a property would consider: Are bookings likely to remain strong? What if tourism declines or a recession hits travel? Because short leases have less guaranteed future income, a short term rental-heavy property might be valued lower than a comparable property with a stable long-term tenant. Spouses may disagree on projections – the spouse keeping the property might argue for a lower valuation due to risk and effort required, whereas the other spouse might argue the booming short-term rental market makes it highly valuable. One approach is to use conservative assumptions or apply a discount rate to future income to account for risk.
3. Labor and Goodwill: Ask how much the rental’s success depends on the owner’s personal effort. Does one spouse handle all guest communications, cleanings, marketing, and maintenance? A buyer (or the other spouse) might not be able or willing to replicate that effort, which diminishes the transferable value. When valuing, itemize the tasks and time involved in running the rental. If a lot of “sweat equity” is needed, a buyer may factor in the cost of hiring a property manager or the risk that without the current host’s dedication and 5-star reviews, income might drop. All of this can justify a lower valuation. Conversely, if the property is mostly hands-off (perhaps managed by a third party or a simple system), then it’s more like a turnkey investment and could command a higher value.
4. Regulatory and Legal Factors: Local laws and regulations can significantly impact value. In Los Angeles, for example, the Home-Sharing Ordinance and other regulations restrict property owners’ ability to freely rent their property. Similarly, if the property is a condo or in an HOA with bylaws against short-term leasing, the value may also be negatively impacted. Any impending changes (like stricter enforcement or new taxes on STRs) could further reduce the value of the property.
5. Difficulty Agreeing on Value: Because of all the above, spouses may need to bring in experts to assess the fair market value. A joint appraisal or dueling appraisals might be necessary. If appraisals diverge, spouses may consider a settlement where they split the difference or use an average, or even agree to put the property on the market to see what real offers come in (market testing). Keep in mind transaction costs too – if selling would incur 6% realtor commissions, that effectively lowers the net value. Experienced family law firms such as Shayan Family Law have networks of property appraisers that can help provide these appraisals.
Tip: Enumerate all factors that affect the property’s worth: recent appraisals, rental income statements, occupancy rates, upcoming major repairs (a new roof?), legal compliance, and management and oversight responsibilities.
Co-Ownership and Post-Divorce Management
Can ex-spouses still co-own and operate an Airbnb together after divorce? Legally, yes – divorce does not automatically sever co-ownership of property. Ex-spouses can remain joint owners. In practice, however, these arrangements come with challenges:
Court Preferences: California courts generally prefer to untangle spouses’ finances at divorce. A judge will not order ex-spouses to continue co-owning a major asset like a rental property after divorce, unless both parties agree to it. If the spouses can’t agree, the judge is more likely to order the property sold and the proceeds split, or have one spouse buy out the other, which is far less likely. The rationale is that forcing continued partnership on unwilling parties could lead to ongoing conflict or litigation (for example, disagreements over managing the property or splitting expenses). Therefore, co-ownership post-divorce is typically a voluntary settlement choice, not a court-imposed solution.
Co-Ownership Agreements: If spouses decide to continue co-owning their rental property post-divorce, it is critical to have a detailed written agreement outlining each party’s rights and responsibilities. This agreement should cover division of profits, responsibility for expenses, management duties, and decision-making protocols. These agreements can also include mechanisms to resolve disputes and address future potential issues around disposition of the property – for instance, a right of first refusal if one person wants to sell their share, or an agreed timeline to re-evaluate co-ownership after a few years.
Practical Challenges: Co-managing a rental requires trust and cooperation. Issues can arise if one owner doesn’t pull their weight or if personal tensions bleed into the business. There could be disagreements on setting nightly rates, making capital improvements, or how to respond to guest damage. Having an exit strategy, such as agreeing to co-own for a defined period and then sell or buy out, can help alleviate future disputes.
Licensing and Legal Compliance: In Los Angeles, maintaining a short-term rental legally post-divorce might require one person to qualify as the “host.” If neither will live there, spouses may need to obtain an extended home-sharing permit.
Business Structure: Some divorcing couples formalize the co-ownership by creating an LLC or trust to hold the property, with each ex-spouse retaining shares. This can add a layer of liability protection and clarify the financial separation. It might also simplify tax reporting, but it may come with added costs and tax implications.
Title and Succession: Former spouses who continue to co-own property should also be mindful of how title in the property is held and how that may affect succession rights upon a spouse’s death.
Tip: While post-divorce co-ownership is feasible, it is complicated and seldom advisable. It can work well for some ex-spouses, particularly if the divorce is amicable and both are committed to an investment goal (for example, keeping an L.A. rental for 2 more years to build equity and then sell). Divorcing couples going down this route should carefully memorialize, in writing, how they intend to own and manage the property and address issues as they come along. It’s also wise to include a mediation or arbitration clause in a co-ownership agreement, to have a mechanism to resolve disputes without going to court. Ultimately, co-owning property means that divorcing spouses are still financially tied together – this continued entanglement can lead to friction, and the pros and cons must be carefully weighed.
Strategies for Fairly Dividing Short-Term Rental Assets
Dividing an Airbnb or vacation rental in a divorce requires creativity and careful consideration of both parties’ interests. Here are some common strategies to achieve a fair division:
1. Sell the Property and Split the Proceeds: The most straightforward solution is to put the property on the market, sell it, and split the net proceeds 50/50 (or another agreed ratio if not fully community). This clean break avoids future entanglements. It’s often the default if couples can’t agree on another solution. However, selling may not be ideal if the market is down or if the property is a lucrative income source. Factors such as market conditions in Los Angeles or whether selling will trigger a taxable gain must be considered.
2. One Spouse Buys Out the Other: Another common approach is for one spouse to keep the rental property and “buy out” the other spouse’s share by making an “equalization payment”. Essentially, the spouse retaining the rental property pays the other spouse an agreed sum representing their half of the equity. The buyout payment can be in cash, or through offsetting assets – for example, one spouse takes the $500,000 rental property in exchange for giving up claims to a $500,000 brokerage account or an equivalent portion of retirement funds. Key considerations in such a scenario include whether the buying spouse can obtain financing for the buyout or can afford the carrying costs on his or her own, and whether the parties can agree to a valuation. Where possible, the buyout should be carefully drafted in the divorce decree to qualify as incident-to-divorce and, therefore, non-taxable.
3. Co-Ownership: As discussed, spouses can agree to continue owning the property together. They might do this to keep receiving rental income or to wait for a more favorable time to sell. If choosing this, it is usually advisable to set a timeline or trigger for a sale or buyout in the future. During the co-ownership term, profits can be split and responsibilities divided as per the spouses’ agreement.
4. Offset with Other Assets: Even without a cash buyout, spouses can trade assets. For example, Spouse A keeps an Airbnb property and Spouse B keeps the family home or another asset of equal value. Or Spouse A gets the rental and Spouse B gets a mix of smaller assets plus perhaps a promissory note if needed to equalize. This approach is essentially a form of buyout that works best in high-asset divorces where there are multiple valuable assets on the table that can be juggled. It’s also important to ensure that the assets being traded are valued correctly based on a variety of factors. For example, cash in a savings account is liquid and not typically subject to taxation, but a retirement account may not be accessible for decades and early withdrawal can trigger penalties.
5. Structured Settlement or Installments: If a lump-sum buyout isn’t feasible, spouses can agree to a payment plan. For instance, one spouse can keep a property and pay the other spouse their share of equity over time. This allows the retaining spouse to use future rental income to gradually buy out the other’s interest, however, it also ties the parties together financially until payment is made in full. In these instances, it is critical to have clear terms (i.e. How frequent and large are the payments? Is interest being charged? Will the selling spouse have a lien on the property?).
6. Use of an LLC or Trust: In more complex cases (especially if multiple properties or partners are involved), spouses might transfer the rental property into an LLC, whose operating agreement can cover management and ownership issues. For couples with children, a trust arrangement might be beneficial – e.g., the property’s income is managed for the benefit of the children, or to postpone division until kids are grown. These setups require careful legal guidance from estate-planning and business attorneys, but can provide helpful solutions when dealing with an expansive portfolio or estate.
Tip: Divorcing spouses should weigh the emotional and practical costs of continuing to be linked via a property versus the financial benefits. Sometimes a clean break (even if less profitable on paper) gives both parties freedom to move on. On the other hand, if handled responsibly, retaining a high-performing rental can be a smart financial move for both. Upfront communication is essential and divorce mediation can be helpful to brainstorm options that a court might not order unilaterally.
Protecting ownership interests in investment properties during divorce can be a complex process. Divorcing couples who own Airbnb or other short-term rentals in California should consult with experienced family law attorneys to understand their rights and ensure that their interests are protected. Shayan Family Law, APC has extensive experience representing landlords and real estate developers in Los Angeles, and can help short-term rental property owners capably navigate the divorce process. Visit shayanlegal.com or call 310.855.5555 to learn more.
Disclaimer: information contained in this post is for informational purposes only and is not legal, tax, or financial advice. Laws, rules, and regulations are constantly subject to change and each person’s circumstances are unique, so independent legal, tax, and financial advice should be sought.
