By Gary S. Williams CFP®, CRPC®, AIF®
While there are some readers of this column who can afford a two, three, or four-plus million-dollar home, most of us only get to dream about living in a massive estate by viewing pictures of Cal Ripken’s old home in the BBJ, watching Selling Sunset on Netflix, or finding reruns of MTV’s Cribs. If you are considering buying luxury real estate, as a discerning buyer, you should contemplate many important points. While there are more considerations than space in this column, here are the five that come after “location, location, location.”
Considerations for Buying Luxury Real Estate
Two considerations relate to tax law changes that stem from the Tax Cuts and Jobs Act (TCJA) of 2017. First consideration is the $10,000 cap on state and local taxes (SALT) deduction. Prior to TCJA, luxury home buyers could justify the purchase, in part, because property taxes were substantially, if not entirely, deductible. Now, these deductions are limited to only $10,000. In many parts of Maryland, property taxes alone, without considering SALT, exceed $10,000. Second consideration, for homes purchased after December 2017, TCJA limits the interest deduction associated with an up to a $750,000 (including first and second homes) mortgage. There are many nuances associated with these tax law changes, and it would be highly suggested to consult your tax advisor if you are considering a large mortgage in a high-property-tax area.
The third consideration would be the length of time you plan on living in the home. Generally speaking, it is much easier to sell a $400,000 home than it is to sell a $4 million home. There are obviously not as many buyers in the latter case. If you are planning on living in the home for ten or more years, this doesn’t matter as much. On the other hand, if you plan to move or downsize in a few years, purchasing a luxury home could be an expensive mistake if you are forced to sell it at a loss.
A fourth consideration would be the cost of the upkeep and repairs. Unless you are buying a posh condominium, chances are the luxury home is located on a sizable amount of land with shrubs, gardens or other extensive landscaping, and possibly a pool. You will either need to take the time to manicure your own property or hire a company to maintain it for you. In addition, with a large property, you will need to consider the costs of upkeep, such as HVAC and a new roof, as the property ages.
Lastly, I want to share a memorable story. In twenty-five years of advising clients, there are some stories that are etched in my mind. One of them is when a client called me and told me about an employee he cared about and who he thought was making a serious mistake. The employee was earning a good income but wanted to purchase a home that was substantially more expensive than he could afford. I mean, outrageously outside his means. This was back in the housing bubble when you could get a loan without much of a down payment or income verification. My client hired me to consult with this employee to try to explain the economic reasons why he should not purchase the home. He was fixated on the outside perception of wealth to family and friends that this home would (falsely) create. I will let you guess what happened. My point is that you need to ask yourself if this purchase is going to make you happy but “house poor,” and if so, are you really willing to make that sacrifice and limit your lifestyle for the sake of your home.
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