Buying an out of state retirement home which can potentially pay for itself, or wait? (vacations, 2013)
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I was trying to figure this out myself and have received conflicting advice. I have a longtime vacation home I purchased almost 20 years ago that I am considering someday making it my primary residence. It is a small house and we may prefer to sell it after a few years and purchase a larger home and was wondering what the affect would be on capital gains since our vacation home has appreciated nicely.
.This new proration portion of § 121 kicked in on January 1, 2009, so all rental usage before then is a freebie if converted however any non qualified use after that date is prorated .
A property management firm for one property? Nah. Besides, there's no one who cares about your property as much as you do (or will) no matter how much you pay them. Is this place so far away that you can't manage to get there every few months to put eyes on?
Collecting rent is easy. Finding tradespeople or a local handyman to do repairs isn't hard, either. It's just one property. Imagine the LL who has twenty properties and still goes on vacation every year. S/he has to deal with tenant complaints from halfway around the world. Try doing it from a cruise ship sometime.
As to the buy now or wait question, only you know the market. If it's in a historical district, is it likely to be snapped up by people leaving blue states, with pockets stuffed full of cash?
The population is about 9000. I've already spoken to one realtor who said she does property management on the side for people who rent their place and live elsewhere.
You're right, it's only one apartment with one person living in it, lol. It shouldn't be a big deal but I do want someone local there watching it and deal with the tenant. I've chosen a location to retire which works well for me but has not been discovered as a retirement mecca. It's not within driving distance of where I live. I would need to fly out there and stay a few days when necessary.
Last edited by marino760; 07-24-2019 at 09:57 AM..
.This new proration portion of § 121 kicked in on January 1, 2009, so all rental usage before then is a freebie if converted however any non qualified use after that date is prorated .
We never rented it at all. Only for our own use as a second home intended as a future retirement home. So according to the article I guess we would get the full exemption if we lived there for 2 years.
I agree with the others: buy it, if you're certain that this town is the place you really want to retire to. Who knows how long you may have to wait for another suitable house to come onto the market if you pass up this one?
This can certainly work, but I wouldn't buy the place sight unseen. In 2016, we purchased a home in our desired retirement city but had/have owned other properties there for 12 years and knew the general area. We had a renter in for 2.5 years starting just after we purchased. Renter was a single man who worked long hours and had little impact on the house. He paid the mortgage directly to us, although we have a retired friend in the city who was happy to be available if anything went wrong (when needed, we compensated her). Our renter paid a rent that exceeded the mortgage/taxes during this time, and we had someone in the house so that it didn't sit vacant. When the renter moved out this year, we paid off the mortgage and converted the house to our use.
If you put in an offer, can you get to the city and do a personal inspection to make sure there are no surprises? Otherwise, having a good renter in half the property makes the situation much more attractive.
This can certainly work, but I wouldn't buy the place sight unseen. In 2016, we purchased a home in our desired retirement city but had/have owned other properties there for 12 years and knew the general area. We had a renter in for 2.5 years starting just after we purchased. Renter was a single man who worked long hours and had little impact on the house. He paid the mortgage directly to us, although we have a retired friend in the city who was happy to be available if anything went wrong (when needed, we compensated her). Our renter paid a rent that exceeded the mortgage/taxes during this time, and we had someone in the house so that it didn't sit vacant. When the renter moved out this year, we paid off the mortgage and converted the house to our use.
If you put in an offer, can you get to the city and do a personal inspection to make sure there are no surprises? Otherwise, having a good renter in half the property makes the situation much more attractive.
Yes, I saw the house last time I was there, but only the exterior. It was very well maintained and stood out to me as a nice house, but it wasn't on the market yet.
Of course, I would fly out there and hire someone to do an inspection of the house if I was going to buy it. The interior was recently remodeled so it can't be too bad but I know I need to see it.
Yes, I saw the house last time I was there, but only the exterior. It was very well maintained and stood out to me as a nice house, but it wasn't on the market yet.
Of course, I would fly out there and hire someone to do an inspection of the house if I was going to buy it. The interior was recently remodeled so it can't be too bad but I know I need to see it.
We purchased the home we currently live in before selling our other house and moving. We had targeted a particular neighborhood where we wanted to live. We spent over two years slowly renovating it in anticipation of moving in. Our old house took quite awhile to sell and we finally moved in 3 years after purchasing it. Although the timing was not ideal we are very happy where we live and plan to stay here until my wife retires. Since nothing has come up for sale in our desired location in the past 4 years since purchasing and the prices have increased in nearby areas we are happy that we purchased it earlier. It is a nice option that you have a renter. If you are certain that is the area you eventually want to be buying it now sounds like a good plan. You can also get your unit ready while you have the working funds so it is all set when you retire.
Yes, I saw the house last time I was there, but only the exterior. It was very well maintained and stood out to me as a nice house, but it wasn't on the market yet.
Of course, I would fly out there and hire someone to do an inspection of the house if I was going to buy it. The interior was recently remodeled so it can't be too bad but I know I need to see it.
This must be an exciting time for you. If you buy that house, it'll be a step in the right direction. Good on you!
OP, I was in your situation with two condos in two different states (ie, in California and New York - while my primary home had to stay in Massachusetts). I went and bought the condos in both cases, decades before the intended retirement, because both had some advantages that I could not have easily found again. Although I thought I would rent both of the places out until I could use them more extensively, I ended up liking one of them so much that I never rented it out, but have been using it as the second home since 2008. The other one I did rent out from 2008 til end 2018, had problems with tenants, decided not to rent it out any more, and have been using it for myself here and there starting this year. For this third condo, the net rental income (after expenses) in 11 years has been equal to about 2/3 of the low purchase price, and the cost of keeping that condo (in NYC) is equal to what I would pay for 45-60 days at the cheapest hotel in NYC, so if I stay at that condo for 45-60 days per year, it pays for its own upkeep. Despite continuing to mull over what I might ultimately do with the NYC condo (it is in a scruffy area of the city, although the condo complex is actually very safe), I was never sorry for buying these condos (the other one is in San Francisco), and I indeed do not think that I would have had another chance to buy something I liked equally for the same price in the same cities. You only live once, and if you see something you like, and if there is any question about not being able to find it again, I would definitely go for it.
Something else re having to prorate the $250k tax exclusion for the sale of primary home if there are years in which you did not use the property as the primary home (ie, the years in which you used it either as a rental property or a secondary home.... incidentally, I bought both of my secondary condos in 2008... then the tax law was changed to introduce this prorating in 2009... bummer :-). But anyway, there is something else in the works that may help with that, even though it is a long shot at this point. Republicans (actually, the proposal is from Cruz who regrettably did not get to be the president - but Trump has just recently, about a week ago, issued some form of comment regarding his (Trump's) intention to move in that direction), so Republicans have under consideration another change to the tax law, ie, to index capital gains to inflation. In other words, your gain on sale of a property (if the tax law change should happen - which is an enormous if, because Democrats have indicated that they would fight it tooth and nail) would NOT be computed as the difference between your sale price and your original purchase price (with whatever adjustments are applicable for upgrades etc), but the difference between your sale price and your purchase price indexed for inflation (ie, increased to match what your purchase price would have been in the year in which you are selling the property). Conceivably, if the price of your property did not increase more than the rate of inflation between the time you bought it and sold it, under the changed law you would have no taxable gains when you sold any of your homes even if you sold them for much more than you bought them for (which would hold for your primary home, second home, third home, n-th home, as well as any stocks you might want to sell at a gain that matches inflation). But again, this change of law is a very remote consideration at this point. Also, for people holding primary homes in areas where property appreciates steeply and way ahead of general inflation, taking the $250k tax exclusion (and even more so the $500k exclusion for a couple!) on primary home (per current tax law) may actually be more favorable than paying this potential inflation-indexed capital gains tax on sale of primary home.
We never rented it at all. Only for our own use as a second home intended as a future retirement home. So according to the article I guess we would get the full exemption if we lived there for 2 years.
No, per current law, you can only get the full exemption if you lived at your primary home for 2 years in the 5 years prior to the sale AND it has been your primary home at all times since Jan 1, 2009. Second home is considered a non-qualified use of property, same as a rental property (although for a rental property there is also an additional cost of past depreciation that has to be added to the sale price - which is not applicable to the sale of a secondary home. But tax exemption on capital gain has to be prorated for a second home use, same as for rental use, if you used the property as a second home after 2009, regardless of the fact that you then lived there for 2 last years prior to the home sale).
If you owned your home for X number of years, used it as the second home for Y number of years starting in 2009, then after that used it for at least 2 out of 5 last years as the primary home, your tax exemption on capital gains from sale of that home ($500k for a couple, $250k for a single owner) is reduced by the % of years the home was used as the second home after 2009 (ie, Y number of years), out of 100% time you owned the home (ie, X number of years).
But, as I mentioned in my previous post, tax laws change somewhat frequently, and there is a chance capital gains tax on property sale may change in a more favorable (or less favorable, depending what kind of property) direction in the future....
Sorry, my posts might not be entirely clear (although they are if you read them carefully, and bear with my English as a second language :-). The point is that you have to prorate the $500k/$250k capital gains exclusion if you used a property as a second home any time after 2009, even if you used the same property as the primary home for the last 2 years prior to putting it on the market. That is the current law.
Last edited by elnrgby; 07-24-2019 at 12:00 PM..
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