Key takeaways
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With some reflection and thoughtful financial planning, owning a second home in Florida can be a rewarding experience. Giving equal weight to the practical and emotional elements can help you make a purchase that you can truly enjoy as your home away from home.
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As always, location plays a key role in residential real estate purchases. Consider your short- and long-term interests as well as future healthcare needs when selecting your location.
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Practical matters such as financing options, estate planning and the pros and cons of establishing permanent residency should be carefully considered. A discussion with your financial advisor can help you understand the possibilities.
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 snowstorms during 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 in 2016.2 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 a vacation spot as well as an investment property.
5 areas to explore before jumping in
Whatever the reason you’re interested in buying a second or permanent home in Florida, how do you choose the one that’s best for your situation? “Consider the practical and emotional values of the property—as well as its cost and location—before taking the plunge,” says Charles Nilsen, Sr Managing Director of Residential Lending at SVB Private. It’s easy to fall in love with a great property at a good price, but be sure to consider the following critical factors before jumping in.
Related read: Are you thinking of moving your primary residence to a tax-advantaged state?
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 a home away from the bustle of popular resorts? Or is being close to the best 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 the distance and ease of access for your guests. If you eventually plan to retire to your second home, think about proximity to healthcare services and the importance of building a network of friends and supportive relationships.
Consider the practical and emotional value of the property — as well as its cost and location — before taking the plunge.
2. How will you finance your getaway?
Depending on your financial situation, you may decide to buy or build your Florida home with cash and forgo the fixed- or adjustable-rate mortgage options. Instead of dipping into your investments and taking the tax hit, consider 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. 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 SVB Private wealth investment account.
“This strategy can help you keep your diversified assets at work while you quickly secure your vacation home. And the cost of the variable rate line of credit can be quite favorable for this short-term need,” he explains. Later you can apply for a conventional mortgage to pay off the credit line where you may be able to 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 are not there. The management office may be able to coordinate occasional rentals and the time set aside for family or friends.
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 or priorities?
It’s wise to consider 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 reminded us, it’s also critically important to make sure your property is adequately protected and insured against natural as well as man-made disasters. 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 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 to rent 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 caution, suggests Nilsen. Real estate can be a good diversification strategy because its performance is not correlated to stocks. However, you 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 subjecting yourself 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 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.
Related read: Retiring overseas: what to consider before you embark
As recent hurricanes like Irma and Harvey reminded us, it’s also critically important to make sure your property is adequately protected and insured against natural as well as man-made disasters.
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 condominium 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 condominium 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 your home state and Florida is key as the requirements can vary from state to state. Most states use both quantitative (number of days in the state) and qualitative (facts and circumstances) ‘tests’ to determine residency/domicile for tax purposes; however, the details for each state are different.
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 well 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.
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:
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Have abandoned your Massachusetts domicile
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Have established residence in Florida
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Plan to reside in Florida permanently
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To establish your new residence/domicile in Florida you should:
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File a Florida Declaration of Domicile
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If you drive, obtain a Florida driver’s license, and register your vehicles there
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Register to vote and then actually vote in Florida
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Notify Massachusetts and federal tax officials of your new status
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Establish a homestead exemption if you purchase a home in Florida vs. renting
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Update your estate planning documents to comply with Florida law
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All of these Florida-based actions will help show Massachusetts your true intentions.6
5. What are the estate and legacy planning implications?
Purchasing a new vacation property may also mean making changes in your will and your trust documents to reflect how the new asset will be managed at your death or incapacity. You’ll need to decide:
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How will you title the asset? In your own name? Or jointly with a spouse or other individuals?
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If the property is in another state, should you put it in a trust to avoid the extra expense and aggravation of probate in two separate states?
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If you rent out your vacation home, do you want to hold the property in an LLC to reduce your personal liability from renter claims?
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Will you gift or bequeath your vacation home outright to your children (or other beneficiaries) or will you create partial interests to be divided among the group and then held in trust?
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Do you want this home to remain in the family for future generations? If so, creating a document with the rules for use and operation of the property can reduce disagreements among your heirs.
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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. Reworking your estate planning documents shouldn’t be difficult, particularly if they are already in place in your previous state. However, be careful if you have already funded a living trust in your former state as this may trigger income tax consequences in that state regardless of whether you are still a resident there. 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.
To discuss your vacation home options, contact us today.
To better understand how to navigate your second home purchase, contact your SVB Private advisor or visit svb.com/private today.
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
6 - https://www.thebalance.com/how-to-become-a-florida-resident-officially-3505215
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