When I was younger I used to think that the best thing I could do would be to buy a second home in Arizona. Why? Because some day I want to live there in the winter (aka: Be a Snowbird). I was convinced that a key strategy to my investing and saving for the future was to lock in a low price on a place to live in Arizona today to get rid of the risk of unaffordable prices later. I’ve since changed my mind.
Real estate in various parts of Arizona is dirt cheap these days. Mind you, that comes from someone living in the Seattle area where prices are much higher. In 2006 the median price of a home in the Seattle area peaked around $400K. That has come down a bit since then but it’s still much higher than the price of many new homes in Arizona. The median price of a house in Arizona in 2006 was half of Seattle’s. I found brand new housing developments down there with houses starting in the $110K range. During the real estate "run up" that we’ve experienced over the last X number of years, the prices in Arizona seemed to be going crazy. Just like Vegas, reality is setting in though.
Over the years I’ve also realized that owning a second home isn’t a low cost endeavor. Whether it’s used as a vacation home or a rental, there are many monthly costs to contend with. Since long distance landlording (Hey, did I just make up a new word?) doesn’t sound very appealing to me, I’d most likely just sit on the property and let it drain my bank accounts. For my personality profile, being a landlord just doesn’t feel like a good fit.
So what am I doing instead? Well, for starters, I’m saving money. On top of that, we have the second home out near the lake that we are enjoying during our younger saving years. By my estimation, we’ll be able to sell it as we get closer to retirement age and use the proceeds to buy a place in Arizona. Who knows. By that time, we may decide to invest the proceeds of the sale and just rent a place there in the winter time. The important thing for us now is to keep on task by saving and watching our spending so that we have all of the potential options open to us later.
You’ve heard about the new unfavorable tax change in the new housing act that was passed recently, right? It might affect you in the future. In the past, you could move into your lake house, live there for 2 yrs, then sell it w/o paying any capital gains tax. Now any property sold after 2008 will fall under the new rule. Say you used it as a vacation home until 2016 and used it as a primary residence in 2017-2018 and sold it at the end of 2018 with a $400k profit. You’re now only allowed a certain ratio of the capital gains tax shelter. My math might be a little off, but now you’re only allowed to take 2/10 of the 400k tax-free. The 8 years you used it as a vacation home force you to pay taxes on the 8/10 of $400k. With democrats coming back to power, a 25% capital gains tax by the year 2016 is not out of the question. Just a FYI.
Thanks for the comment Mike. Yeah, I’ve been reading about that, although your explanation was really easy to understand compared to some of what I’ve read. I wasn’t aware that they added all the years that you used it as a secondary residence. When I first read it I thought it said that I’d only get penalized a fraction of the 5 years. So, if I was only in it two years out of 5, I’d have to pay 60% of the capital gains. I’ll have to go back and read it again.
Be careful purchasing a home in Arizona. I have a friend that lives in a newer development where about half the homes are either unsold, foreclosed, or simply abandoned. He said copper thieves already hit two of those homes. Make sure you have a very good security system and that you have neighbors willing to keep an eye on things.
median price of a home in the Seattle area peaked around $400K. WOW!! That is an incredibly high median price. It is more than double what it is here in Minnesota.
I’ve been active in taxes for lengthier then I care to acknowledge, both on the personal side (all my working life history!!) and from a legal stand since passing the bar and pursuing tax law. I’ve rendered a lot of advice and righted a lot of wrongs, and I must say that what you’ve posted makes utter sense. Please carry on the good work – the more individuals know the better they’ll be armed to comprehend with the tax man, and that’s what it’s all about.