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.
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