Tax Law and Business Organization Strategy

Using a Vacation Home as a Retirement Vehicle

This idea comes from Christopher J. Fenn, CPA, in his article "Apply Weath Protection Strategies for 2007 and Beyond" published in WG&L's Practical Tax Strategies.

An alternative or supplement to qualified plans can be a vacation home, particularly for those with children. While the children are living at home, the family enjoys the “retirement fund” on weekends. After the children leave for college, the parents make the vacation home their principal residence. Up to $500,000 of the gain on sale of the former principal residence is tax free, while any remaining gain is currently taxed at 15%. Once the parents have owned and occupied the former vacation home as their principal residence for at least two years, they become eligible for another $500,000 exclusion on the later sale of that second principal residence.

In comparison, withdrawals from a taxable plan such as a 401(k) would be subject to the higher ordinary rate (up to 35%). If the parents decide not to sell the second principal residence and instead allow it to transfer to the children after death, the entire appreciation on the home would escape income tax because it would be treated as an inheritance.

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