Ever been divorced? Are you in the middle of one now? Divorce is dark and unpleasant. The financial pain of marital separation is especially acute when major assets such as a home are involved.

Below, we explain ways to mitigate the suffering by keeping your real estate portfolio relatively intact. In this risky broader market, real estate still affords outsized capital appreciation, especially as home prices continue rising. Don't let a divorce undermine your long-term wealth-building strategy.

In a divorce, the first step in dealing with real estate issues is to determine the value of the property. A Realtor at very little cost may perform a real estate valuation. Equity is the true value of the asset to the parties. It is determined by subtracting any loans secured against the property from the properties' market value.

In many cases today, properties have negative equity (i.e., loans exceed the value). In addition, people may be experiencing difficulty making their payments and properties are "in distress" (i.e., in risk of foreclosure).

In a financial settlement, if the real estate is awarded to one party, the other party must be compensated for his share of the marital equity. Conversely, as in many cases today, one or both parties are left to manage the negative equity, or debt, associated with real estate.

The next step is to determine what portion of the equity is marital and what is non-marital. Some states, primarily those that we call equitable property states, do not require division of some assets in a divorce. These are called non-marital assets. Any non-marital assets that you possess remain yours and any non-marital assets of your spouse remain the assets of your spouse. In most cases, non-marital assets may include:

  • Premarital: Any asset acquired before the marriage (if the asset was encumbered by a loan that was paid off during the marriage, it may only have a partial non-marital value);
  • Prenuptial Exclusions: An asset excluded by a valid prenuptial agreement;
  • Personal Injury Proceeds: Personal injury settlements are generally considered personal to the injured party and are non-marital in nature;
  • Inheritance: Any proceeds or assets from an inheritance;
  • Gifts: Any asset acquired as a gift to one, but not both parties.

It is important to recognize that all assets are considered part of the marital estate unless proven otherwise. This places a significant burden on the party making a non-marital claim.

Some states offer the party with a non-marital interest added value on that investment that is due to passive appreciation of the asset. "Passive Appreciation" refers to the increase in the value of the asset based on market fluctuations and which is not due to any work or improvements made to the property during the marriage.

Allowing a party to claim a non-marital interest plus passive appreciation is adopted by only a small number of states. In many cases, a home, while non-marital in its cost/value basis at the start of the marriage, may have marital equity associated with it through appreciation over time that could be attributed to the marriage and efforts of both parties.

Dividing the Assets

When a property has equity and payments are current, options to consider are:

  • List for sale and divide net proceeds after tax and other costs (could also involve transfer of other assets as compensation for equity);
  • Refinance mortgage and seek additional funds to pay off the other parties' equitable interest;
  • One party retains and chooses to live in the property if he can afford the house once divorce is final;
  • Sell at a future date - one party remains in the house or entertain a lease option to a qualified lessee;
  • One party remains in the house and pays rent to the other party who retains ownership; this option can have tax advantages for one party and should be considered in the overall settlement.

The bottom line: Don't let divorce shatter everything you've invested over the years in real estate. Be proactive, learn your rights under the law and protect your future.

For further advice, consider consulting the financial advisors at Charles Schwab (SCHW - Get Report) , TD Ameritrade (AMTD - Get Report) , or T. Rowe Price (TROW - Get Report) .

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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.