Financial Considerations of Owning Two Residences in Retirement

For most federal retirees, retirement is a time of change. One of those changes is a change in residence. Some federal retirees prefer to live in one location during the winter and another location during the summer. The term “snowbirding” is often used to describe the phenomenon of owning two residences in retirement. No matter what it is called, owning two residences in retirement requires careful financial planning.

There are many sources providing information about “snowbirding.” However, these sources tend to focus on where to live (for example, many publications such as AARP magazine discuss the “ten best places for retirees to live”) rather than focusing on how to make “snowbirding” work from a financial planning standpoint. In the first of a series of columns detailing financial considerations for “snowbirding“ in retirement, this column discusses “owning versus renting” personal residences in retirement and determining domicile.

Owning Versus Renting

A federal employee who intends to own two residences in retirement likely owns one personal residence and is considering the purchase of a second residence as part of their retirement plan. An important question for a retiree to ask is whether they can afford to own two residences during retirement. The alternative is to rent a second personal residence.

There are advantages for a short-term (four months or less) rental versus ownership of a retirement home. A short-term rental does not involve changing the state of domicile (see below), having to incur more debt in the form of a mortgage, and making any significant financial changes.

A long-term rental in the form of signing a long-term lease for a retirement home would be advantageous in the following reasons: (1) Avoiding maintenance and repairs associated with home ownership; (2) Not having to incur large debt in the form of a mortgage; and (3) Having an easier exit plan in case the rental does not work out. The disadvantages of a long-term rental include: (1) Ongoing rental payments can represent a burden to retirement income cash flow; and (2) Rental payments would have to be paid even if the rental unit is not being occupied. If a retiree considers renting only by the month, then the rental unit will most likely be occupied by other renters in the off months.

Assuming a retiree can afford to purchase another personal residence for their retirement, outright ownership can be more advantageous than a retirement home rental. With respect to affordability, the retiree needs to consider all the expenses associated with a retirement home ownership including: (1) Additional homeowner’s insurance (which has significantly increased in many parts of the US over the last few years); (2) Homeowners association (HOA) fees; (3) Security; (4) Maintenance while away; (5) Cable and wi-fi; and (6) Transportation between residences.

The advantages of retirement home ownership include: (1) Building of equity in the home and the ability to pass down the home to family as a legacy at death; and (2) Making it easier to establish legal domicile (see below) in the state in which the retirement home is located, and perhaps saving on taxes. For example, purchasing a retirement home in Florida and Texas in which there is no state income tax and establishing residency could result in reducing the retiree’s overall income tax liability. These tax savings may help offset some of the other expenses that are associated with owning two residences in different states.

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Determination of Domicile

Over the years, much has been written regarding the determination of an individual’s legal domicile (residency). An important reason for establishing legal domicile is state and local income taxes. There are retirees who live in states with high income taxes and who want to change their domicile to states with no income tax. This trend to move from high income tax states to low- or no-income tax states has gotten a push since the passage of the Tax Cuts and Jobs Act of 2018 (TCJA). TCJA placed a $10,000 limit on the state and local tax deduction for federal income tax purposes.

However, for federal retirees, a retiree’s choice of domicile should not necessarily focus on choosing to live in a state that does not have an income tax. This is because there are several states that exempt from their state income tax a portion of federal retirement benefits. For example, Alabama, Illinois, Kansas, Massachusetts, New York and Pennsylvania do not tax CSRS and FERS annuities in spite of the fact that these states have a state income tax. Many states with income taxes do not tax Social Security benefits. Federal retirees should also research other taxes (besides state and local impose taxes) that are imposed by these states when considering where to retire. These other taxes include sales tax, property tax and the homestead exemption that may apply to property tax.

There is a common misunderstanding among some retirees that legal domicile is established by the simple action of living in a state for at least a half year. This action is called the “6 months and 1 day” action. Many states are “revenue hungry” and will look for their residents who should pay their full share of state income tax in spite of the fact they are not living in the state for several months in the year. It may not be enough for a retiree to simply prove they were living in the new state for more than six months during the year.

Each state has its own rules with respect to legal domicile. Retirees planning to live in two residences are advised to seek qualified tax counsel in both states. The following table presents some common steps that can be taken to establish a change in legal domicile.

Common Steps Individual Can Take to Prove a Change in Domicile State

Item	Explanation
Home ownership	Own a home in the new state. Better to rent in the previous domicile state
Car ownership	Change care registration, license plates and driver’s license to the new state
Voter registration	Change voter registration to the new state
Estate planning	Replace the last will and testament with one created in the county of the new state
Mailing address	Change the mailing address to the new state for bills, bank and brokerage statements, 1099 forms and IRS Form 1040
Amount of time living in new state	Reside in the new state for a minimum of six months. Consider using tracking software to establish time living in the new state. Food and gas receipts should be retained.

Financial Considerations of Owning Two Residences in Retirement - Part I

There is in fact no one right way to establish and prove a change in legal domicile. A retiree’s goal to prove a change in legal domicile should be for the retiree to provide an abundance of proof to the extent that the retiree’s former legal domicile will not pursue a claim.

Ed Zurndorfer, EA, ATA, CFP®, CLU®, ChFC®, CEBS®, ChFEBC℠: Federal Employee Benefits Expert

A former career Federal employee, Ed has published a staggering 1,200+ separate articles on Federal Benefits and Retirement!
Just “Google” his name, and you are likely to find a plethora of sites that contain his writings. Drawn to its mission to reach, teach
and serve Feds, Serving Those Who Serve is the only financial planning practice with which Ed has chosen to affiliate in over
20 years teaching. In addition to conducting Federal Benefits seminars for Serving Those Who Serve, you can find Ed’s
writings here on our blog in the FedZone, and on Fed-Soup, MyFederalRetirement, FederalNews Radio and NITP.

He is a member of the Maryland Society of Accountants, the National Association of Enrolled Agents, the International Society of Certified Employee Benefits Specialists, the Financial Planning Association, the National Association of Health Underwriters,
and the Society of Financial Service Professionals. Since 1999, Ed has taught many thousands of Federal employees about
their benefits, in person and at Federal agencies all over the country. Ed is a true national treasure.

Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street - Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.