BARRON'S - America's Best Retreats
The law of unintended consequences has struck the second-home market. Increase taxes on the wealthiest Americans, and second-home prices jump. That's what we've discovered during our annual review of the second-home market. Buyers fleeing high-tax states are snapping up properties in states with less onerous tax burdens, animated by the dictum uttered by Judge Learned Hand, who famously stated that Americans have the right to construct their affairs to produce the lowest possible tax burdens.
Some second-home enclaves are, in short, morphing into domestic tax havens, with sales of multimillion dollar homes in states without income taxes increasing considerably in late 2012. The big winners were Wyoming, Nevada, Florida, and Texas; real-estate agents tell Penta the trend is carrying briskly into the current year. Conversely, it's interesting to note that the few resorts registering price falls last year included the Hamptons and Pebble Beach in high-tax New York and California, respectively. Homes in the right tax locations that once might have been classic "10 by 2s"—which fantastically describes $10 million property used two weeks a year—are increasingly being used as primary residences.
But the second-home market is now showing signs of health at almost all price points, in almost every market considered, which is helping to eliminate the excess inventory that has been hanging around since the recession. On our list of the 20 best places for second homes, which starts on the following page, fully 16 of the locales registered price increases last year. Many sales last year closed within 10% of the offering price, and all indications suggest that 2013 will be the year of real estate, as BlackRock, the world's largest stock and bond manager, advised its clients.
That's even though last year didn't start out that hot. High-end real-estate sales struggled for much of 2012, until state and federal elections in November and Washington's fiscal-cliff sideshow in December, energized what seemed to be a second-straight year of lackluster sales. The threat of rising taxes and a mistrust of the stock market together prompted buyers to buy luxury homes.
Wyoming, a state without debt and a budget surplus of about $1 billion, saw a tax-motivated buying surge in Jackson Hole. Palm Beach, Fla, long known as a place of great wealth and oceanfront trophy properties, saw a similar spike. Les Evans, a Palm Beach real-estate attorney, attributed the rise to the wealthy, particularly hedge-fund managers, fleeing high-tax states like New York. Texas and Nevada also benefited from the absence of state income taxes.
Federal income taxes will of course increase in 2013 to 39.6% from 36% for anyone earning more than $400,000 in taxable income, or for couples earning $450,000. In California, a $6 billion tax increase included a millionaire's tax. Anyone who makes over $1 million pays California's income tax of 9%, plus a 3% millionaire's tax, potentially bringing their total state, local, and federal burden to 55%. That, apparently, is the tipping point. Californian millionaires drawn to Wyoming's outdoor life also are buying into Jackson Hole because their total income taxes will top out at 39.6%—Wyoming doesn't have state or local income taxes.
One California businessman after the November election quickly bought a $15.5 million property. They moved part of their financial business to Texas. By year's end, the California couple had become Wyoming residents with state driver's licenses, voter-registration cards, and bank accounts to boot.
One Los Angeles financial advisor, who asked to remain anonymous, said many of California's wealthiest residents are moving to Lake Tahoe's Incline Village, in Nevada, to escape California's taxes. "After a while, it becomes real cash, and that's why all these guys live in Tahoe," he said, requesting anonymity for fear of triggering audits by California's tax agents.
State governments are naturally very aggressive in these matters. California state-tax authorities actively check airplane tail-number registrations and telephone records to confirm that people aren't secretly working in California and claiming residence in Nevada, where there is no state income tax.
Also important to note: Property taxes can be unusually low in some tax-friendly states. In Wyoming, for example, property taxes tend to total about $6,000 per $1 million of assessed property value. In Harrison, N.Y., a Westchester suburb, annual property taxes on a $2.5 million home can easily exceed $60,000 a year. If your business can travel, and you like the outdoors, it's hard not to see the logic of such a move. Of course, there also will always be folks who buy beautiful houses in beautiful places simply to enjoy the view.
So, here, now, our list of the top 20 resorts in America. This year, we have added Austin, Texas, and Mount Desert Island, Maine. We thought the growing interest in low-tax Texas and Austin better suited to our audience than sleepy Highlands, North Carolina, which we dropped. In Maine, meanwhile, we substituted Mount Desert Island for Castine, not because we were down on Castine but because Mount Desert Island has in recent years seen the highest valued property sales in the entire state. That caught our attention.
A word, too, about the numbers. Each broker makes its own database criteria and calculations, explaining why its median sales figures may not even be comparable with the calculations of the broker next door. One broker in Martha's Vineyard might create an average out of all the properties on the entire island, for example, while another might create a median second-home price out of only the island's highest-priced ZIP codes. We used several new brokers this year, so we recommend comparing only the median prices in this issue, rather than trying to match up median prices from past issues, which often came from different sources. Also note that the median sale in communities with a small number of properties can be distorted by a few very expensive houses selling one year, followed by a year when all price points are selling, including condos. The median price might fall between those two years, even though the real-estate market in the latter year is possibly more robust.
1. JACKSON HOLE, WYOMING
The stunning town is surprisingly easy to reach, with direct flights from many major cities, which is why folks are buying in Jackson Hole to escape high taxes elsewhere. Many initially come to ski and fall in love with the little mountain town of 20,000. It gets its name from trapper David Jackson, who, in the early 19th century, set up his operation in the hole surrounded by the Teton Range. The sales sweet spot in "the place," as locals call Jackson, is about $2 million to $10 million, or you can snag a year-round house in a spot near Yellowstone National Park. You can ski in winter, and fly-fish the Snake River, raft, hike, and ride bikes and horses during the warmer months. Be sure to hit the Snake River Grill, where the Culinary Institute of America-trained chef turns out American classics that has put him on the James Beard Award radar. If you forget anything at home, gear up at Teton Mountaineering.
Median price, 2012: $1.8 million
Median price, 2011: $1.2 million |