Who Gets the Vacation Home in a Massachusetts Divorce?

If you own more than one home and you are getting a divorce, it’s important to be aware that the tax implications for each will be different and that this will affect your overall divorce settlement. Your primary residence is treated differently from your vacation home and rental properties will have slightly different tax implications too.

Deciding what to do about the vacation home in divorce can be difficult for emotional as well as financial reasons. Some vacation homes may have been in the family for generations. You might have memories of spending time there as a child with your parents or even grandparents. Even if you haven’t owned a vacation home for long, you could be wondering how to put a financial value on a beloved retreat that you and your children enjoyed during hot summers, or pandemic restrictions.

If a home is worth more to you than its dollar value, you will need to understand what you gain or lose if you choose to hold on to the home. If you are involved in divorce litigation, you could be up against a soon to be ex-spouse who isn’t prepared to let go of either the home or the value of the home. Whatever happens you need to understand what you’re up against. There are certain tax considerations that apply to a vacation home in divorce that don’t apply to your primary residence. When handled right, making a decision about the vacation home in divorce can be a financially prudent move that could be a cornerstone of your future security after divorce.

Questions to Ask About the Vacation Home in Divorce

Asking yourself a few key questions about your vacation home can help you decide how it should be handled in your divorce.

What are the tax issues with the vacation home?

The most important thing to know about second homes in divorce is that unlike your primary residence, second homes don’t come with a tax exemption. In the primary residence, if you have lived there for 2 years, each of you gets a $250,000 tax exemption on any profit you make from the sale of the home. Your vacation home isn’t considered your primary residence, so you won’t get a tax exemption if you choose to sell it during your divorce.

Property transfers in divorce are tax-free, so you can transfer the vacation home between spouses tax-free as part of your divorce settlement, but as soon as you sell it, you’ll have to pay tax on the sale. The capital gains tax you pay on the sale of a second home is also determined by how long you have owned the home and whether or not it was your principal residence during that time. If you have owned the home for more than a year, the federal capital gains tax is between 0 and 20%, depending on your income. If you are deciding who gets the vacation home in divorce, the income of both spouses could be a factor in determining how to get the best deal.

Is your vacation home marital property?

It’s common for your primary residence to be marital property. This is the home you have both lived in during the marriage. You likely bought the property together and may have raised your children there. Even if your spouse owned the property before you married, there are reasons why you might be entitled to claim an interest in the primary residence as marital property, such as if you paid bills and maintained the upkeep of the house. A vacation home that was bought by a spouse before the marriage, or that was inherited by a spouse is not as clear cut of an issue. The Court will look to see how if at all the property was incorporated into the marital enterprise. To do this they will look to see when the property was inherited or purchased, how the expenses on the property were paid, whether the family used the home, how any rental income for the property was used and if there were improvements made to the property during the marriage. There may also be more nuanced factors based on your personal circumstances.

If a vacation home is inherited property that has been in one spouse’s family for generations, the Court will try to keep that property with the spouse who inherited the property, if there other asset available to off-set the value of the home. In addition to the financial issues associated with diving inherited property there is also often times emotional issues that must be navigated in order to resolve division of inherited assets.

Should you hold on to the Vacation Home?

Sometimes it makes financial sense for divorcing spouses to realize the cash value of all their assets by splitting everything and selling any assets including real estate. Deciding what assets to sell can depend very much on timing. The condition of the real estate market could prompt spouses to sell a vacation home or to hold on to it either separately or together.

Your decision may also depend on whether the property will appreciate significantly and how much tax will be due when you sell it. People often choose to sell their primary residence shortly after divorce to take advantage of the tax exemption. Since many Massachusetts families own homes in the city or suburbs where property values are higher it may make more financial sense to sell the primary residence, as it is the home with the most value. The vacation home could be a different matter.

Sometimes spouses divorce reasonably amicably and have the ability to leverage the marital assets in their divorce as part of a “business deal”, so they can continue to co-own a vacation property and even rent it out. There is huge variation in the kinds of agreements divorcing spouses make about their assets, and it’s important to find the right solution for your individual situation. You might want to transfer all or part of the vacation home to your spouse in the divorce. You might continue to hold on to an interest that is lower than your ex-spouse, which could be better for you from a tax point of view if your income is higher. You could agree to share the home and use it as a vacation property for a number of days during the year. You could convert the home to a rental property, which can bring tax advantages. It can also mean that when you choose to sell the home you can defer capital gains tax using a 1031-Exchange.

Every divorce is unique, so the decision about what to do with the vacation property will always boil down to what is right for the individual situation. If you decide to hold on to the property together you will need to work with an experienced Massachusetts divorce attorney to make a careful agreement that avoids future conflict. Unfortunately, sometimes a spouse can react emotionally and deciding what to do about vacation homes could require hard-nose negotiation and may end up in court. A vacation home has both a financial value and an emotional value, and a Massachusetts divorce attorney experienced with real estate and inherited properties and that tax ramification associated with each will be able to help you decide how to get the best out of your vacation home and obtain a favorable divorce settlement.