And you thought your vacation home was only a benefit to you at the end of a long work week or a retreat for the family and friends. Think again.

Currently the federal estate tax exemption is set at $2 million, increasing to $3.5 million in 2009, and going away in 2010. Then we start all over again at $1 million. Compound that with increasing the top tax rate from 45% to 55%... and Congress hasn’t even begun to address new legislation to combat the nation debt. (See article: "It’s What We Don’t Know that We Don’t Know that Hurts.") In a recent speech by John Edwards, he claimed, "Rich people don’t pay their fair share" so he proposes raising the capital gains tax from 15% to 28% for those making over $250,000 a year. Here we go. There is really only one way to look at it: taxes are going up or exemptions are going away.

What should you do? Start planning now. While I question whether to benefits of the step up in cost basis will still be around in the coming years, as we know it, there is new legislation (and existing law) that you can benefit from by reducing your tax. What’s the answer? It could be your out-of-state vacation home.

It is more than the sun that has escalated the second home market in Florida. Florida boasts zero state capital gains tax (along with New Hampshire, Tennessee, South Dakota, Wyoming, Texas, Nevada, Washington, and Alaska). This tax savings has obviously contributed to the growth of Florida’s real estate market. Certainly, if you own an out-of-state vacation home in one of these states, you may want to consider changing your residency. (See article: "Free Cash or The Principal Residence Exclusion. What Does that Spell? The Good Life.") Consult with your CPA to determine if changing your residency would make a difference in your overall tax planning. You will want to take into consideration other taxes like sales tax, property tax, and estate and inheritance taxes. Here are just a few of other tax considerations you may want to consider when making that decision.

While the federal estate tax rates may be fluctuating, many of the states are holding firm to their tax rates, referred to as "decoupled". So for those that hold real estate in those states (Washington and Maryland, for example), your estate tax bill will be greater than those states that have not decoupled. Most states offer exemptions when passing the assets to your spouse or family members. Thorough review and evaluation of these estate tax laws could make a significant difference when it comes to deciding where you are going to call "home".

Another state tax benefit to consider is income tax. The states of Washington, Wyoming, Texas, Nevada, Florida and South Dakota have no income tax. For simplicity we have listed those states with the highest income tax rates floating around five percent or lower: Arizona (4.79%), New Mexico (5.3%), North Dakota (5.54%), Connecticut (5%), Maryland (4.75%), and Pennsylvania (3.07%). New Hampshire and Tennessee are limited to dividends and interest income only while the following states measure their income tax on the federally adjusted taxable income: Colorado (4.63%), Illinois (3%), Indiana (3.4%), and Michigan (3.9%).

We recognize that one tax may be a trade off for another. Some states may offer significant benefits with no income tax but may recoup that loss with an aggressive sales tax or property tax. We highly recommend you visit www.retirementliving.com/RLstate1.html for a more thorough overview of each state’s taxation structure, giving emphasis to their sales tax, property tax and estate and inheritance taxes. It goes without saying that one must carefully evaluate the overall tax consequences when making these residency decisions. For example, Florida is very attractive in many ways but it has a high real estate transfer tax to consider. The State of Washington has no income tax, no capital gains tax, a moderate property tax (making up only 30% of their total taxes) but has an estate tax that can range between 10%-19%.

Something new to consider: Vermont, New Jersey, Massachusetts, and Connecticut have passed new legislation to allow unlimited marital deductions for gay couples in civil unions. Heterosexual couples have always been entitled to these benefits where spouses can gift any amount of assets to each other without paying any state gift or estate tax. Again, we are addressing state law; seek competent advice as to how this may affect you at the federal level.

So before you jump into selling your out-of-state vacation home because it has become too problematic to maintain because of the distance from your primary residence, you might want to consider solving that problem by moving in. Yes, there could be some very good reasons, going unnoticed, to sell your current home and take advantage of the $500,000 principal residence exclusion and move to a state that might offer more than a vacation, but an estate planning boom.

Mark C. Hughes is President and CEO of Virtuosity Unlimited, LLC which operates with a team of advisors to help those with highly appreciated assets or lucrative businesses to downsize or transition their equity into viable options without paying unnecessary taxes in the process. Mark can be reached at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it or visit www.virtuositypro.com. Mr. Hughes and Virtuosity Unlimited, LLC publishes the VirtuosityPro eNewsletter as a service to its clients and their advisors. While we make every effort to ensure the accuracy and reliability of the information published, we do not warrant or guarantee the accuracy of the information or its fitness of purpose.