If you're entering your retirement years, you may be considering buying a second home in a warmer (or cooler) clime. Perhaps your goal is to escape the winter weather. Or, maybe you want a home nearer to the grandkids.
Whatever your purpose for wanting that second home, here are some things to consider as you make that decision:
Income Tax
Several states do not have state income tax. Creating a second home in one of these states could reduce your tax burden. These include Alaska, Florida, Nevada, New Hampshire*, South Dakota, Tennessee*,Texas, Washington and Wyoming.
*NOTE: While New Hampshire and Tennessee do not require residents to pay income tax on regular wages, they do tax dividend and interest income.
However, it is important to note that different states tax retirement income differently, and others have very specific criteria that identify your responsibility to pay income tax in that state even if you only live there a few months of the year. Before you buy a second home in a different state based on an income tax strategy, speak with a knowledgeable tax advisor. For more information on state income taxes, check here.
Property Tax
Another tax that can wreak havoc on your retirement savings is property tax. Just because a state does not have income tax, it may not be the best place for you to set up your retirement residence. For example, Texas does not have state income tax, but Texas is among the 10 states with the highest property taxes, as is New Hampshire. Even so, your personal tax burden may benefit from shifting your state of residency to one of these states, so again, discuss your specific situation with you tax advisor.
Access
Of course, if access to your grandchildren is of primary concern, you'll want to move as near to them as possible, so the tax consideration might be low on your list. If not, be sure you have access to the things you do want.
As you age, however, the possibility that you might become ill rises. Make certain that along with access to your family you have access to top-notch, affordable medical services. Investigate local access to care before you buy your second home.
Alternative Income Stream
Some folks buy a second home for possible rental income, planning to move into the home after retirement. If this is in your plans, here are some things to be aware of: Regardless of what you might read or hear about holiday rentals, they don't always pay for themselves. Most holiday areas have high seasons and low seasons. If you can't make enough rental income in the high season to cover the entire year, this might not be a good option for you. Even in resort area, inclement weather can take a big bite out of your potential rental income. Additionally, you still have all of the costs of maintenance, upkeep, insurance and repairs to contend with. Of course, with online rental portals like airbnb.com or homeaway.com you might have an easier time finding qualified guests these days. Most experts warn that rental income from holiday rentals rarely covers your entire mortgage though, so don't plan on that as a motive to buy.
If you're considering buying a second home for any of these purposes, consulting your local real estate expert is the place to start.
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