If you're lucky enough to own two homes, you may have recently packed up and moved to your summer residence. That's nice, but it can have tax consequences that are anything but a day at the beach.
Homeowners who don't spend some time determining where their primary residence is -- and proving it -- can lose out on capital gains and income tax breaks.
Moreover, their heirs can sometimes end up paying estate taxes to more than one state on the same inheritance, says Bob DiQuollo, a financial adviser with Brinton Eaton Wealth Advisors in Morristown, N.J.
Folks in high-tax states face this a lot if they go back and forth between Florida and the Northeast. DiQuollo points out that a couple with a $150,000 taxable income would pay $4,684 in New Jersey income taxes if that was their permanent residence, but would pay no income taxes if they were Florida residents.
If the couple die with a $1 million estate, their final official residency would be crucial. Their children could end up paying $33,200 to New Jersey for estate taxes but nothing to Florida.
And states will fight for that money, says DiQuollo, who offers some tips on how to prove you live where you say you do. "A half-baked attempt to change residency could be much more costly than no attempt at all," he says.
Here's how to make sure your residency plans are fully baked:
Don't abandon your current residency until you've thought out the tax implications. If you expect to sell your home for a large gain, remember that you can exempt up to $250,000 ($500,000 for married owners) of that gain if you've lived there for two of the five years before you sell it. So live there until you're close to selling the home. And remember that if you live there for two years, move away, and put it on the market almost three years later, you could lose the exemption if the house doesn't sell very fast.
Consider taxes before you buy your second home, if you're expecting it to become a permanent residence. Florida's not the only place where you can save big money on taxes. Delaware, Washington, and Wyoming also hold the line on income taxes.
You can find a thorough examination of the tax policies of every state at retirementliving.com/RLtaxes.html.
It's worth checking because sometimes a small move -- from Massachusetts to Rhode Island, Maryland to Delaware, Oregon to Washington -- can save you thousands of dollars every year.
Watch your timing. If you live in one place for more than half a year, it's not that difficult to prove it's your permanent home. But if you live in one home for five months, live in another for five months, and travel for two months, your residency is questionable.
Prove that you really live where you say you do. Register your car there. Get a driver's license and vote there. Bank there. Use the airport closest to that home when you're taking big trips. Keep utility bills that show you're always using gas, water, and electric there. Have other bills and correspondence sent to that address, too.
Consider your working life. Retirees don't have to worry about it, but it's hard to make the case that you've switched states when you're still working full time at an office around the corner from your old house. If you're self-employed or telecommuting, you may be able to move away, declare a new state your permanent residence, and continue working.
If you really save thousands in taxes every year, you might even be able to use that money to enable you to discontinue working.
Linda Stern is a freelance writer. She can be reached at firstname.lastname@example.org.