That lake cabin where you hosted summer barbecues or the ski condo you escaped to on long weekends can turn from a cherished retreat into one of the most complicated pieces of your divorce. Second homes carry more than market value: they bring mortgages, maintenance costs, rental income, tax issues and often strong emotional ties. When it is time to divide assets, those factors can make a vacation property harder to handle than a primary residence.
The following will discuss how the courts often handle these types of issues and provide tips to help you work through the process.
How do courts view second properties during divorce in Colorado?
Courts in Colorado will take various factors into account when making their determination. Before doing so, they will determine whether the property falls into one of two categories: marital or separate. Marital property is property acquired during the marriage and subject to division during divorce. Property owned before marriage, received by gift or received by inheritance is generally separate. Appreciation of separate property can become marital when attributable to marital contributions such as mortgage payments from marital earnings, improvements funded during marriage or spouse labor that increases value. It is also important to note that commingling can convert separate equity into marital.
Before beginning negotiations about the second property, it is helpful to gather the following information:
- Deed history, title changes and trust ownership if applicable
- A record of funding sources for down payment, mortgage and improvements
- Use patterns, rental income and any expense payments
- Prenuptial or postnuptial agreement terms if applicable
Once this information is available, courts in Colorado will generally apply equitable distribution to determine next steps. This basically means they divide marital property fairly, not always equally.
How does a second property fall into the discussion for equitable distribution?
The first step is often valuation. This is not often an easy feat. Market volatility in resort areas can complicate appraisal and rental properties require analysis of income stream, vacancy rates and management costs. Debt allocation may also be an issue if there is a mortgage, special assessments or deferred maintenance. Taxes can also be a part of the discussion as there is the potential for capital gains exposure, depreciation recapture and even transfer taxes that can affect net value.
How can I reduce the risk of any surprises?
Tips that can help better ensure things go well include the following:
- Organize the records discussed above. Having paperwork ready can cut down on time and frustration during the negotiation portion of the divorce.
- Know what you want. Those going through a divorce will need to consider their priorities. What is it you want most after the divorce? Is it the second property? The primary home? Are there other assets you are interested in? It can be beneficial to have a list in order of top priorities to help keep focused during negotiations.
- Prepare to negotiate. Before finalizing forms, negotiate to help get the assets you actually want after you finalize the divorce. Consider offering a trade of other assets with similar values for full retention of the desired asset.
Second homes require careful classification, credible valuation and a clear understanding of each party’s goals upon completion of the divorce. Once decided, it is important to tailor a divorce settlement agreement to the details of your case to better ensure it covers all relevant information. This can include title transfer, debt payoff and tax exposure.
Although many forms are required to complete the process, a successful divorce is about more than just filing out forms. It requires careful negotiations and an understanding of the potential impact of the agreement on each party’s future. Legal counsel with experience in this area of law can help to mitigate any surprises and better ensure a smooth transition into post divorce life.