The 2011 Tax Mystery
Almost a decade ago, some convoluted political maneuvering by Congress resulted in a series of tax cuts that came with an expiration date. Known familiarly as the "Bush tax cuts," these provisions are set to end on December 31, 2010. If no new legislation is approved, tax rates that were in effect prior to 2001 will return. A look at some of the "old" tax laws scheduled to return, and the possibility that lawmakers will extend or modify the current provisions.

It's too early to make a definitive statement, but the fallout from the real-estate bubble may result in some fundamental long-lasting changes in Americans' perspectives on home ownership. Not only is there the chance that fewer Americans will be able to own a house, but even those who are prime candidates for home ownership may find other options more attractive and financially profitable.

A little background:

Before 1940, slightly less than half of all American households owned a home, a percentage that had remained unchanged for more than four decades. Following World War II, the Baby Boom, coupled with government tax breaks and subsidies, rapidly increased the percentage of Americans who owned their house1. By 1960, more than 60% of Americans were homeowners, and for a period in the late 1990s and early 2000s, the number approached 70%.2 Homeownership became a standard fixture in the American Dream.

However, the allure of homeownership has lost much of its luster in the recent financial melt-down, both for homeowners and the financial institutions who initiated the mortgages to make the purchases possible. Where once only a few financial commentators questioned the financial value of owning a home, a tide of commentary is asking if the US economy would be better off with fewer homeowners and more renters. But maybe the problem isn't how many people own a home, but what type of home they own.

When the housing market was booming through the past two decades, it was assumed that almost every homeowner could expect to cash out with relative ease, either by selling the house or taking a home equity loan. Home equity was seen as a liquid real asset, one that could be accessed at almost any time.

However, as banks have tightened their lending standards to potential homeowners, the market of potential buyers has shrunk, driving prices down. At the same time, more homes are being liquidated at discount in foreclosures and short sales, further depressing the market. In the course of the past three years, current homeowners find their home equity has substantially diminished - and isn't very liquid.

These changes in the real estate market increasingly make homeownership a much longer term proposition. A decision to buy a home today isn't easily undone. For those who currently own a home, it may take awhile for values to rebound, and selling the home in the future is no longer a foregone conclusion, even at reduced prices. This fundamental change in perspective regarding homeownership should compel individuals to consider questions like:

In the past half-century, the largest increase in American residential housing has been in suburban communities, and the bulk of the middle-class homeowners own single-residence dwellings in subdivisions. If you are one of these suburban home-owners, how would you answer the questions above? Can you see yourself staying in this house for the next 20 or 30 years, or into retirement? Would someone else want to live in your subdivision? And if your children or other heirs inherit this property, will they see it as a valued asset or a financial albatross?

When you consider the changing demographics of an aging population, a post-Baby Boom contraction in housing demand for single-family homes, and fewer financially-qualified home buyers, it is reasonable to think the long-term prospects for suburban housing won't be what they have been for the past 50 years. If this is true, a different approach to homeownership might have some appeal.

A different approach.

Instead of a single-family house as the default option for real estate, look at other options. For example, think about renting a primary residence and buying a "second home" - such as a cottage, a vacation or resort property, or a even an income property in a thriving community. Under the right conditions, this strategy could have several advantages.

First, many buyers of a "second home" property could still receive tax advantages that would closely approximate those that come from owning a primary residence. Second, income from rentals (seasonally on resort properties, or year-round in residential locales) may offset many of the costs of ownership. Third, resort and vacation properties can be enjoyed by owners and their families for their recreation and destination value, both now and in the future. Fourth, renting may offer greater flexibility in adjusting to fluctuating living conditions, such as changes in employment or children leaving the nest. Fifth, if it is desirable to make this property a home in retirement, the transition is simple; you stop renting and move into the house. Sixth, a profitable rental or desirable vacation home would likely have ongoing value for heirs; a sale would not be required for them to receive value from the inheritance. This strategy of buying a "leisure home," while living in a rental is not a new idea. This pattern was typical of many wealthy individuals during the late 19th and early 20th century. They owned an "estate" in the country, and rented a workplace residence. American steel magnate and finance giant Andrew Carnegie (1835-1919) was one of the richest men in history, and he established his fortune quite early in life. When he was in his twenties, Carnegie erected a large estate home on property in Homewood, PA, near his hometown of Pittsburgh. Yet for much of the next 25 years, Carnegie resided in luxury hotels in New York City, returning to his estate during the summers or as a stop on his travels. At various times, other members of Carnegie's family also lived at the estate, but it was never Carnegie's exclusive residence. In later life, Carnegie established additional large estates in Massachusetts, Georgia and Scotland.

In several ways, the "titans of industry" during the Industrial Revolution mimic some of the work circumstances of people in the 21st century Information Age. Carnegie and other businesspeople of his era were establishing continent-spanning businesses that required them to be mobile. Even though some employers may offer telecommuting options, today's workforce opportunities often require a high level of transience. Today's worker expects to change jobs more often, and to change their places of residence as well. While any relocation is stressful, it could be argued that renting makes moving easier from a financial perspective - there is no home to sell, no monthly mortgage payment on an empty home, and there is no equity loss to worry about.

At the same time, buying an "estate property" offers several tangible and financial benefits, both now and in the future. A well-managed income property has the potential to add revenue to your financial program. A vacation home can be a welcome getaway and a gathering place for families as they grow up and expand. In both instances, the need to sell will be lessened, which allows more time for equity appreciation, and gives owners the upper hand in deciding when and if a sale should take place. If this property stays in the family for several generations, the long-term benefit of buying estate property could be incalculable. As the turmoil from the Great Recession recedes, the fallout is revealing changes in the financial landscape. Those changes may affect the role of homeownership in the American dream. While single-family residences may still occupy a prominent place in the financial lives of many Americans, it doesn't hurt to consider (and prepare) for other options.

DO YOUR LONG TERM FINANCIAL PLANS INCLUDE "ESTATE PROPERTY?" IF YOU FOUND AN ESTATE PROPERTY OPPORTUNITY, HOW WOULD YOU EXECUTE THE TRANSACTION? WOULD YOU LIKE TO EXPLORE THESE, OR OTHER IDEAS WITH US?