Your Vacation Home… and Divorce
I don’t know how many divorcing couples own vacation homes. But I have a feeling it’s not a small number. After all, the latest numbers from the National Association of Realtors show that buyers purchased 502,000 vacation homes last year, an increase of 7 percent from the year before.
And I have a theory, actually, that I have seen played out among my friends: people often buy second homes in lieu of a divorce to create a separation, so they don’t have to live together. Actually, it’s a whole lot cheaper than a divorce.
But if you DO split, vacation homes can add a tricky wrinkle to divorce finances, especially in a community property state such as Texas. Who gets the vacation home when a marriage ends? What if the home is in a non-community property state or even in a different country? Good questions, ones you should be aware of before you buy, no matter who you plan to tuck away in that bungalow!
I queried Marcus McCue, senior vice president of Guardian Mortgage Company, and family law attorney Carol Wilson from Carol A. Wilson Law to learn more about the special issues surrounding second shelters and the D-word, divorce.
Candy: Let’s start first with a primary residence – how does that usually get dealt with in a divorce?
Marcus: Generally, our customers either sell the house or refinance it. They want the other person’s name off of the title (ownership) of the property and released from the mortgage obligation. We usually hear from our customers early in the process because they want to know their options, which is an important step when they are working on the details of the divorce.
Getting an individual name removed from the title of the home is a much more straightforward process than removing a borrower from a loan. To remove a borrower who is obligated to a current loan, that loan must be refinanced into the sole obligation of the spouse retaining the home. Once we have discussed the logistics of their options and the estimated rates, costs, and future monthly payments, our clients will call us back later after the agreements are in place to proceed with the preferred option.
Carol: While every divorcing couple is different, the analysis process is the same with a primary residence. I help my clients think through whether or not they will be able to maintain the home after the divorce and keep up with the mortgage payments. Often there will be less money in the household after the divorce. If they can’t afford the home, then they have to sell.
Many families with children want to keep the family home for them until they are older and/or in college. In this case, I often see both parents cooperate and reach a settlement to make that possible. Sometimes one spouse will agree to wait to get the equity out of the house until after the children have left.
In Texas, a couple can have a special contract – an Owelty Lien Agreement – such that one spouse will own the house, but the other will still retain rights to equity that was present in the house at the time of the divorce. This gives the first spouse the right to make improvements and to own the home, but the second spouse will get his or her share of the equity later when the kids are grown or the market improves or whatever reason the couple has chosen to wait. It is a win-win because the owner-spouse gets the benefit of all improvements and equity growth in the meantime, but the other spouse still gets the benefit of all the years of contributing to the equity when they were married.
Candy: So how is a vacation home different?
Marcus: If we are talking about a beach house in Corpus Christi, then the matter is straight forward from our perspective. The couple sells or one person refinances the property in their name. As far as the mortgage company is concerned, any property acquired during the marriage is shared by both people. Whether one person paid for it with an inheritance or out of her own salary is an important difference.
Carol: Most of the drama is on my end! Obviously, people can feel emotional about their vacation homes and the sheltering of the children isn’t an issue here. so you see a lot more disagreements. Once the decisions have been made, however, it is straight-forward. According to Section 7.002 of the Texas Family Code, anywhere the State of Texas has jurisdiction over the couple, the judgment of the court holds sway. This is regardless of the family laws of that particular State or country that might be different from ours.
This means any State in the Union,Canada, Mexico and just about 75% of the world where the legal system is similar to ours will work like Texas. So your condo in St. Maarten is governed by the divorce decree as well as your mountain cabin in the Canadian Rockies. It is property to be divided, pure and simple.
Candy: You said about 75% of the world. Are there places where it is difficult to deal with property in a divorce?
Carol: Yes. Countries where the legal system is significantly different from ours can be impossible. In my practice, for example, I’ve worked with couples who had property in China and Taiwan. In those cases, there was no way to enforce the divorce decree and the property remained with one spouse. You’ll see this situation more with couples where one spouse has immigrated to the United States and has strong ties to the other country.
Also, some countries have strict laws against allowing money to leave their countries so even if you sell the property, the money can’t leave the country.
Candy: What else do couples with vacation homes need to think about?
Marcus: As always, there are key financial considerations to take into account when determining who gets the vacation house. The value of vacation homes is still falling. According to the National Association of Realtors, the median sales price of vacation homes fell to $121,300 in 2011. That’s down 19 percent from 2010.
The spouse that gets the vacation home, then, might be gaining an asset that has lost value. And no one can predict how much more value this asset might lose in the future.
And even when vacation homes rise in value, they can cause financial problems to their new owners. Remember, vacation homes are not eligible for the capital gains tax exclusion that comes with primary residences. Homeowners filing joint returns don’t have to pay taxes on the first $500,000 in gains that their primary homes sales fetch.
Again, this exclusion goes away when it comes to vacation homes, meaning that their owners have to pay taxes on the entire amount of gains they realize upon selling. Say a couple purchased a vacation home for $250,000. At the time of the divorce, this property is now worth $500,000. (Hey, we used to see such gains in the past on real estate. They could happen again, right?) If the new owner sells the vacation property, he or she will have to pay capital gains tax on the full $250,000 in gains. That can significantly lower the real financial value of the investment.
Candy: In this economy, that’s a high class problem to have!
Carol: As with most issues related to divorce, there is no single best way to handle vacation homes. Divorcing couples must take a long look at their finances, and consider how important the second home is to each of them, when deciding whether to sell the home or keep it.
It can be difficult for divorcing couples to compromise – ha! they are divorcing for a reason, after all – but when it comes to second homes, compromise really is the best solution.
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