THE VACATION HOME IN DIVORCE
Living in South Carolina, we are just a few hours away from the beach and the mountains, and many of our clients own second homes to find a quick escape to peace and serenity. However, in divorce, a vacation home becomes another asset to divide and there are many issues to contemplate.
In divorce, just as with your primary home, couples typically have 3 options for future ownership of a second home:
OWN IT TOGETHER
If you and your spouse are amicable and want to continue to share in the use and upkeep of a vacation home, you may consider continuing to own it together after divorce. Make sure you carefully outline the parameters of this arrangement, possibly drawing up a specific agreement for this purpose, so that each of you is clear on the details moving forward.
Questions to ask yourself before considering this option:
At some point, you or your spouse may remarry and will want to use the house with the new partner - how will you feel about that?
What if financial situations change and one spouse wants out?
How will holidays be divided and time spent with the children?
Will upkeep be divided equally or on a pro-rata scale based on income?
SELL THE HOUSE AND SPLIT THE PROCEEDS
Remember, the capital gain exclusion does NOT apply to second homes. If your vacation home has greatly appreciated in value and you will have a significant gain in equity, it may be financially beneficial to sell and take advantage of 1031 property exchanges or an exchange fund. 1031 Property exchanges are very complex and will require some cash to pay the professionals involved.
ONE SPOUSE KEEPS THE HOME & BUYS OUT THE OTHER SPOUSE
If you own two homes of fairly equal value (and equity), it may make sense for each of you to keep a house. Perhaps during your separation, one of you already moved into the second home and you would like to continue your new life there. If you are keeping an appreciated asset like this, you will need to work with a financial planner to understand your options and potential tax consequences.
If you decide you want to keep the vacation home, make sure you can financially afford it:
If the mortgage is in both of your names or your spouses’ name, will you be able to assume the mortgage yourself or will you have to refinance in your own name?
Do you have the credit to refinance in your own name, or will they require a co-signer?
Will your interest rate go up, making your monthly payments increase as well?
Beach houses are especially expensive to maintain. Insurance is extremely high and maintenance has to be done more regularly due to the salt air.
What expenses will you incur on a monthly, yearly or even multi-year basis? Homeowner’s association dues and assessments, replacement of big ticket items like your roof, HVAC unit or appliances. Do you have a budget for these items?
Understanding the impact of each of these options is so important to your financial future. Wouldn’t you like to know if the decision you make will be not only possible but beneficial? As a Certified Divorce Financial Analyst®, I can help you understand how your financial decisions during divorce will affect your future life. We are here for you every step of the way!
The Financial Knot® is another business name for Independent Advisor Alliance, LLC. All financial planning advice is offered through Independent Advisor Alliance, LLC, a registered investment advisor.
