Vacation Homes a Tricky Matter in Divorce Process
Dividing assets in a divorce is often a delicate and complex process. Married couples’ finances are usually tightly interwoven. To make a clean split, couples need to either sell jointly-owned assets or completely transfer ownership to one party. Second homes, or vacation homes, are no exception. Of course, not every couple is fortunate enough to own a second home, but for those who do, it may present special issues in the event of divorce.
Just as with a primary residence, a vacation home may represent either a significant asset or a liability depending on whether the couple has positive or negative equity in the home. The value of vacation homes nationwide continues to fall. According to the National Association of Realtors, the median selling price of vacation homes fell 19 percent from 2010 to 2011. However, a couple who bought a vacation home 20 years ago, or who was lucky enough to buy in an area that has seen a relatively stable housing market, may very well have a good deal of equity in the property.
Primary residences have a capital gains tax exclusion for federal income taxes. Couples filing jointly who sell their primary residence at a profit are not taxed on the first $500,000 in capital gains from the sale. However, second homes do not have this special tax break; all capital gains from the sale of vacation homes is taxable. The real financial value of the property may therefore be significantly less than the apparent equity, and that will affect the overall division of assets in a divorce.
For less fortunate couples, the division of a home in which they have negative equity is especially thorny. Selling and refinancing are more difficult, and the party who ends up with the home, which may in fact still be declining in value, may be further disadvantaged in the future.
Most countries throughout the world have legal systems fairly similar to that of the United States. However, some couples own vacation homes in exotic countries with very different practices, particularly when one party immigrates to the United States and maintains assets back home. A divorce decree from a United States court may be unenforceable in a country such as China or Taiwan, meaning the property located there could simply remain with the original owner instead of being divided equally.
Although constructive problem-solving may not be a strong suit for divorcing couples, the complexity of the issues accompanying divorce, and particularly second homes, makes compromise especially important.