Relocating your residence to a new geographic area is a significant life change. Sometimes it’s related to work, while other times it’s a personal preference. Regardless of the reason, there are many things to consider when relocating your home relative to lifestyle, finances, and taxes.
What Relocating Means to You
Moving to a new locality involves a lot of lifestyle changes such as learning the area, adapting to a new culture, developing new friendships, and more. While work might dictate such a change, others often choose to move when they retire, after losing a loved one, or to be closer to family. Regardless of the reason, moving is a big decision.
As financial advisors, we often counsel clients to consider renting in the contemplated area for a semi-extended period, such as 6 months to a year. A two week visit often isn’t enough time to truly experience a region and decide what neighborhood or areas you enjoy the most. A longer but temporary stay allows you to explore the area and decide if it’s truly where you want to live.
Taking time to make an informed decision is particularly recommended before selling your home, which is an irrevocable decision.
Cost of Living Differences
The cost of living varies dramatically in different areas of the country and the world. For example, it costs far more to live in New York City versus somewhere in the mid-West. The cost elements of living in a new area should be carefully evaluated relative to your income, financial means, and long-term financial objectives. There are many websites that help to calculate and compare the cost of living differential between areas. If the result is that your costs will increase by 20%, your income likely needs to rise by this amount to maintain income parity.
It’s important to note that cost of living differences could be skewed if you plan to buy vs. rent. Looking at actual housing prices is always advisable.
Taxes
Taxes vary by states, cities, counties, and countries. As such, relocating frequently involves a change in your taxes. It’s important to consider differentials in income and property taxes. Variations can be significant, potentially having a material impact on your finances. For example, if you move from a state with a 5% income tax to a state with a 10% income tax, your income needs to be at least 5% higher to simply defray the tax impact.
Home Sale Capital Gain Taxes
In addition to income and property tax changes in a new location, you might also need to consider the impact of capital gain taxes if you are selling a home. Current tax provisions allow each individual a $250,000 capital gain exclusion for the sale of your primary residence. Married couples with joint ownership therefore receive a $500,000 capital gain exclusion. If your property has appreciated by more than the exclusion amount, you will likely owe taxes upon selling your home.
This exclusion is not extended to the sale of second homes. Furthermore, it could be reduced if you ever rented your home.
Moving Costs
In addition to your future costs, there are one-time costs associated with moving. These include hiring movers, buying new things, changing utilities, etc. Moving costs can vary dramatically from a few hundred dollars for a small local move to tens of thousands of dollars for bigger or longer distance moves. In fact, sometimes it’s cheaper to buy new things than to pay the moving costs.
Work Reimbursements
If you’re moving for work reasons, relocation benefits might be available to you. These can be offered whether you’re remaining with the same employer or changing employers. The most common relocation benefit covers moving expenses and home transaction costs, such as paying for closing costs.
Relocation benefits are a significant perk with one caveat. The benefits are typically taxable to you. This means that if your employer pays for $20,000 of moving costs, you don’t pay the expense, but your taxable income is $20,000 higher as a result. This higher income triggers taxes that you have to pay. You can sometimes negotiate an extra bonus to cover such tax impacts.
As with all significant life changes, it is important to evaluate a variety of considerations, including the financial ones. SageVest Wealth Management helps clients to understand the financial aspects of relocating (both near and far), examining the immediate and longer-term impacts. Our goal is always to help you make the best decisions in support of your lifestyle and financial objectives.
