wealthy people often get vacation houses

Why do wealthy people often get vacation houses? Can’t they just spend time at a high end hotel?

This topic highlights one of the 

key differences in how people 

view money. One of the things 

wealthy people are really good 

at is making money work for 

them. So while most people see 

an excessive “vacation home” 

and an expense, the financially 

savvy will see a low-risk real 

estate investment, tax break, 

and ideal family retreat.

Leveraged correctly, the vacation 

home can not only be nearly free, 

you can actually make money 

from it.

To start, there is only so much 

beach front property in the world, 

and buying a luxury home in a 

desirable location is likely to 

generate a higher return than 

stocks/ bonds (depending on 

the economy), provides 

additional diversification in 

your portfolio, 

and is a much better option than 

having cash sitting in a bank 

account getting eaten away by 

inflation.

There is also a huge tax 

advantage to having the 

property in a State with no 

income tax. By listing the 

property as your primary legal 

residence (even if you live in New

 Jersey), you shelter a lot of 

income from State taxes. In the 

case of New Jersey, the top tax 

rate is 8.97% (Income Tax Rates 

By State 2018) and they aren’t 

even the highest. (Oregon is 

9.9%.) As it happens, the States 

with some of the highest rates 

tend to be in the colder northern

climates, and many of the 

States with zero income tax are 

in the south (Texas, Florida), or 

in scenic States where you want 

a vacation home (Nevada,  

Washington, Wyoming)

Of course, listing a home as a 

primary residence has some 

rules on how much time you 

need to spend at the residence 

so this likely isn’t just a getaway 

for a few weekends a year. For 

people who have businesses in 

the colder northern parts of the 

country, spending half the year 

in Florida isn’t a problem. It also 

helps to bring more of your 

relatives to you, as you can 

easily host your children and

 grandchildren for a week in the 

sun, hanging by the pool, or a 

few days at local tourist spots 

like Disney at almost no cost 

for them.

So let’s assume you bought a 

vacation home in Florida for $5 

million, have an annual income 

of $10 million, currently live/

work in New Jersey, and you 

plan to spend at least 140 days 

a year in your Florida home 

(the requirement for the primary 

residence). At $500 a night in a 

luxury hotel (a lowball estimate), 

you’d spend $70,000 a year just 

in hotel fees, or $700,000 over 

10 years. In the same time 

period, the property value will 

have increased (let’s estimate 

an average of 6% per year) and 

is now $8 million. So instead of 

spending $700,000 in hotel fees, 

you gained $3 million + nearly a 

million a year in tax savings for 

a total of about $12 million. 

(Not counting the property tax 

deduction and additional real 

estate deductions)

Staying in a luxury hotel makes 

sense if you like to bounce from

 destination to destination, but if 

you fall in love with a particular 

area nothing beats going to a 

place that’s all yours - decorated 

just the way you want it, and 

having the pool and hot tub all 

to yourself.

Hope this was helpful.

Note: I’m keeping the model 

simple intentionally. I know 

someone will be itching to 

add additional scenarios, 

loan options, and other 

financial minutiae. This is 

not intended to be tax, real 

estate, or financial advice. 

Please consult a licensed 

qualified professional if you 

need advice.