Who is entitled to the funds from our second property in a divorce?

You don't provide enough information to allow a complete answer; but, the general answer is that all marital property (i.e. acquired during the marriage) and appreciated value of separate property is subject to division in a fair and equitable manner. Your facts suggest there is an issue as to what is and is not marital property, but it isn't clear what reasoning your wife's attorney is suggesting.

Look at Moorse Marsden for her reimbursement for paying down the principle.

Based strictly on your information the other attorney is wrong. Prior to marriage your wife does not have the benefit of the California Family Code. Therefore the money used for the purchase was your separate property. Unless you signed a statement that you are transmuting your separate property down payment to now be community property, the down payment remains your separate property. This is a matter of laws, cases and superlative legal representation. When you are dealing with fragile economic issues, competent legal representation should always be sought, as the subject matter of the litigation is so very important. One mistake here could cost you your separate property contribution.

Generally, so long as your refinanced money could be traced (that is, proved that you used the refi money to purchase the home), then that initial equity would be considered nonmarital property and not subject to division. You're correct, the gain realized during the marriage would be marital property and therefore divided. However, there is a law in MN that allows for division of nonmarital property but it is largely discretionary by the judge and not commonly applied. I can think of many scenarios that you would allow for distribution of your nonmarital property voluntarily. One example would be payment for consideration of a spousal maintenance (alimony) waiver.

The statute says that the court is to make a fair and equitable division of all of the property. There are a number of factors that the court is supposed to consider in reaching that division. If the court is going to divide the property, it first has to classify it. All of the property is going to be classified as your separate property, her separate property, or community property. Which of these classifications a particular piece of property falls into will depend on how and when the property was obtained. In most cases, property obtained during the marriage will be community property. Once the property is classified, how it gets divided will depend on a number of factors. Some of the factors that the court may consider are: the duration of the marriage, the ages of the parties, the health of the parties, the educational background of the parties, the employment history of the parties, and each party's future prospects. The court then has to come up with what the court believes is a fair and equitable division of all of the property using these and other factors. Now, if there is enough community property so that the court can come up with a fair division using just the community property, the court will generally do that. However, if there is not enough community property for the court to reach what it believes is a fair division, then, it can invade separate property. So, as a starting point, whether your spouse gets anything of the house depends on what other property is out there. Complicating this is the fact that you bought the property together, and, apparently, titled it in both your names. So, while it isn't a slam dunk, there is definitely a chance that your spouse could get some of the proceeds from the sale of this property.

If you do not have an attorney, get one. Did you purchase the new property during the marriage? I assume both of your names were put on the title when it was purchased, if so, there is a good argument she is entitled to 1/2 the proceeds based on your present representation.

You should hire a competent family lawyer, like me, if you have not already done so. Your question is difficult because the other facts and circumstances of you case may determine what portion of the equity in the vacation home, if any, the court will award to you and/or your wife. When you refer to half the funds used for the purchase, I assume that you mean 50% of the down payment on the vacation home and not 50% of the equity of the vacation home. It may be possible to argue that you should receive the entire down payment, and that any equity above the down payment amount should be divided. This argument may be subject to several counter arguments. For example, you indicate that you refinanced your primary home to make the down payment on the vacation home. Has your wife contributed to the mortgage payments, utilities, maintenance, upkeep, etc of the primary residence? If so, it may be argued that she has contributed to payment of the loan used to obtain the down payment on the vacation home. There may be other arguments for and against an award of a percentage of the down payment amount. My suggestion is that you attempt to negotiate a global settlement considering all of your assets.

The court can divide separate and community. Can you prove it's separate? You're likely to get back your separate but not always. Quit claim deed.

You shouldn't be asking online. That means she has a lawyer and you don't. That's a guarantee of disaster. If this matters to you, get a lawyer ASAP and stop talking to her lawyer.