People buy vacation properties for a variety of reasons — both rational and emotional.
For Jack Walker and his wife,1 it was a seemingly endless series of snow storms in the winter of 2015 that finally drove them to buy the second home in Florida they had always talked about. “We were looking for a place that we could use to escape from the cold weather but also one that was accessible to our kids and grandkids,” he recalls. They settled on a large condo on a golf course where they also can live when they eventually retire.
According to the National Association of Realtors (NAR), more than 720,000 home buyers purchased vacation properties last year.2 Some, like Jack Walker, were looking for a place that could serve the dual purpose of providing a vacation escape and a place where family and friends could visit. Others were looking for a place where they could build roots and relationships for their future retirement. Still others were looking for both a vacation spot and an investment property.
Whatever the reason you’re seeking to buy a second or permanent home in Florida, how do you choose the one that’s best for your situation? “Consider the practical and emotional value of the property—as well as its cost and location—before you take the plunge,” says Charles Nilsen, Executive Vice President and National Director of Residential Lending at Boston Private. It’s easy to fall in love with a great property at a good price, but make sure you also consider these other factors before jumping in.
1. What’s the best location for you — and your family — now and later?
Think about why you’re buying the property. In Florida, the warm winter climate is likely a big factor. But how about the property’s proximity to activities and interests you enjoy, such as shopping, concerts, theater, swimming, golfing, boating, or fishing? Do you want something away from the bustle of popular resorts? Or is being close to good shopping, entertainment, and restaurants important to you?
If one of your goals is to invest in a property that brings friends and family together, as Jack Walker did, consider its distance and ease of access for the people who will be visiting you. If you eventually plan to retire to the second home, think about your proximity to healthcare services in the future and the importance of building a network of friends and supportive relationships there.
Consider the practical and emotional value of the property — as well as its cost and location — before you take the plunge.
2. How will you finance it?
Depending on your financial situation, you may decide to buy or build your Florida home with cash and forgo another mortgage payment. But instead of dipping into your investments and taking a tax hit, there is another option: borrowing against your investments with a line of credit.
For example, let’s say you’ve found the perfect property for your extended family during the holidays, and you don’t want to lose it in Florida’s highly competitive real estate market. “Being able to offer a high percentage of cash can secure the sale,” says Nilsen. But, instead of tapping into your stock market investments and incurring significant capital gains, he suggests looking at the option of getting that extra cash through a flexible line of credit secured by your Boston Private Wealth investment account.
“This strategy can help you keep your diversified assets at work while you quickly secure the vacation home you want. And the cost of the variable rate line of credit can be very favorable for this short-term need,” he explains. Later on you can always take out a conventional mortgage to pay off the credit line and lock in a low fixed rate.
Choosing to buy or build your vacation home in a development with onsite property management may also be a wise decision if you intend to rent the property when you’re not there. The management office can coordinate occasional rentals and the time set aside for family members.
Instead of dipping into your investments and taking a tax hit, there is another option: borrowing against your investments with a line of credit.
3. Will this affect your other financial plans and priorities?
Remember to think about how financing your Florida property might affect your retirement investments and your cash flow if you take out a traditional mortgage.
As recent hurricanes like Irma and Harvey remind us, it’s also critically important to make sure your property is adequately protected and insured against both natural disasters and man-made ones. You’ll want to factor in the high cost of flood and storm insurance if you’re buying near the ocean or on a canal or river. And consider the cost (and availability) of fire insurance if you’re in a more remote location that relies on a volunteer fire crew.
There also may be covenants on shoreline property that restrict how and what you can build to prevent future storm damage and beach erosion. And if you plan on renting out your property, you’ll want to check on whether your casualty insurance and personal liability limits should be higher.
If you’re thinking about purchasing a vacation property purely for its investment potential, do so with some caution, suggests Nilsen. Real estate can be a good diversification strategy because its performance is not correlated to stocks. But you also don’t want to overdo your allocation to real estate by purchasing an individual property that will be a large, illiquid asset in your investment mix.
Investing in a vacation home also means being subject to supply-and-demand pricing and interest- rate fluctuations. “In several markets in the South and West—the two most popular destinations for vacation buyers—home prices have soared in recent years because substantial buyer demand from strong job growth continues to outstrip the supply of homes for sale,”3 says National Association of Realtors (NAR) Chief Economist Lawrence Yun.
Even so, says Yun, for people looking to buy a vacation home “there are still deals to be had. And the value of vacation home real estate is likely to appreciate in the future.”4 That’s certainly true in cities like Jacksonville, Orlando, and West Palm Beach, Florida, where, according to a recent Forbes report on top housing markets, home prices are expected to increase by at least 17% by 2020.5
That may be good news if you’re a seller, but not if you’re looking for a low-cost investment because there are “fewer bargain-priced properties to choose from,” notes Yun.
As recent hurricanes like Irma and Harvey remind us, it’s also critically important to make sure your property is adequately protected and insured against both natural disasters and man-made ones.
4. Should you consider becoming a permanent Florida resident?
As you get closer to retirement, you might think about the possibility of changing your primary residence from your current state to your Florida property, as Mary Bruno did.
Mary owned a large home on the East Coast and a luxurious condo in Naples, Florida for many years. When she initially purchased the Naples property, she had planned to retire there at some point. But in the interim, Mary made many friends, built a strong social network, and created a sense of community at her winter home.
When this spry 90-year-old finally decided to become a permanent Florida resident recently — both to slow down and to take advantage of its income tax-free status — she chose to buy into a desirable assisted living community, using the equity from the sale of her condo as part of the initial entry fee.
Because she had 15 years of winter visits to build roots in the area before her transition to full-time residency, the move was easy from a social and logistical standpoint. And her previous long-term stays in Naples helped her establish the facts and circumstances that tax authorities look at when determining if a true change in residency for tax purposes has occurred.
Knowing the rules for residency in both your home state and Florida is key because the requirements can vary from state to state, says Liza Connelly, J.D., LL.M., Managing Director and Wealth Strategist at Boston Private. “Most states use both quantitative (number of days in the state) and qualitative (facts and circumstances) ‘tests’ to determine residency/domicile for tax purposes, but the details for every state are different,” says Connelly.
To be considered a full-time resident in Florida (i.e., change your tax domicile) you must sever “tax ties” with the jurisdiction you are leaving as wells as build “new ties” (both formal and informal) in your new Florida location. The legal requirements established by the state you are departing from and legal requirements for Florida residency must both be satisfied.
As an example, Connelly outlines the requirements for someone changing residency from Massachusetts to Florida.
“You will be considered a statutory resident of Massachusetts if you maintain a permanent dwelling in Massachusetts and you spend more than 183 days of that particular tax year within its borders.” This is known as the Statutory Residence Test, she explains. So, to end your residency/domicile in Massachusetts you must fail the Statutory Residence Test and satisfy a “facts and circumstances” test which shows that you:
To establish your new residence/domicile in Florida you should:
All of these actions in Florida will help show Massachusetts your true intentions. “Essentially, you must make Florida your new center of gravity,” concludes Connelly.6
Most states use both quantitative and qualitative ‘tests’ to determine residency/domicile for tax purposes, but the details for every state are different.
5. What are the estate and legacy planning implications?
Purchasing a new vacation property also may mean making changes in both your will and your trust documents to reflect how you want the new asset to be managed at your death or incapacity. You’ll need to decide:
If your Florida vacation home becomes your permanent residence, you’ll need to revise your will, trusts, and other estate planning documents to reflect the change, says Connelly. Reworking your estate planning documents shouldn’t be difficult, particularly if they are already in place in your previous state. But be careful if you have already funded a living trust in your former state, because “this could trigger income tax consequences in that state regardless of whether you are still a resident there,” cautions Connelly. It would be best to terminate that previously funded trust and transfer the assets into a new trust established in Florida.
“If you’re purchasing a residence in a continuing care retirement community (CCRC), make sure you ask your advisor to look over the terms to understand how it could affect your cash flow and estate plan. If you’re entitled to a refund of your entry fee when you leave the CCRC, consider directing that money into a trust vs. leaving it in your general estate,” she says.
How Boston Private can help
Your Boston Private advisor can help you explore the effect of a vacation home purchase on your current investment strategy, financial priorities, and estate and legacy plans. To make sure you take advantage of all of the financing opportunities available to you as a Boston Private client, talk to your Boston Private advisor or mortgage lender.
The opinions expressed and information contained in this article are given in good faith, may be subject to change without notice, and are as of the date issued. The accuracy and completeness of this information is not guaranteed. Since each client’s situation is unique, please review your specific investment objectives, risk tolerance and liquidity needs with your advisor before a suitable investment strategy can be selected.
1 - Names in this article have been changed for privacy.
2 - National Association of Realtors (NAR) 2017 Investment and Vacation Home Buyers Survey https://www.nar.realtor/news-releases/2017/04/affordability-tight-supply-cause-vacation-home-sales-to-plummet-in-2016-investment-sales-climb-45
3 - As quoted in the National Association of Realtors’ (NAR’s) report on their 2017 Investment and Vacation Home Buyers Survey https://www.nar.realtor/news-releases/2017/04/affordability-tight-supply-cause-vacation-home-sales-to-plummet-in-2016-investment-sales-climb-45
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