Paul Ferraresi

In my 35+ years as an investment professional, this past year for stocks and real estate, has been a real “doozie.” I will assure you 3-5 years from now you will look back to now as one of the greatest investment opportunities of a lifetime. I see so many people flocking to stores advertising 10-20-30% off various products. Yet, these same people, with the stock market on sale @ 40-50-60% off, are running from the “great companies of America.” But, that is a normal human reaction. An example… we as human beings are wired backwards from the factory. You see we are all trained that low prices are good for us and high prices are bad. A recent example… when gas prices were high motorist stayed home and did not buy. Now that prices have dropped in half…they are buying again.
Here is another example…if you went into the grocery store and a sign was up… manager’s special, today only, small can of tuna fish normally 99¢, now on sale for 39¢. If you liked tuna fish you would load up the cart. Next week you come in and see a sign… manager’s special small can of tuna fish normally 99¢, now selling for $4.25. You would tell the manager he was crazy, (probably run home go to the pantry and return the tuna from last week hoping to get $4.25)
Now the low price good, high price bad is true in everything but the stock market. When a stock price skyrockets from $10 to $50 everyone wants to buy at $50. Yet when the price drops from $50 to $10 no one wants to buy. IT IS ON SALE.
Do you buy tuna @ $4.25 and when the price is on sale @ 99¢ do you return the $4.25 cans you bought to the store and hope to sell them back at the sale price of 99¢? Is this making sense?

Assess the Ultimate Goal
Usually when you ask clients whether they plan to buy a second home for pleasure or investment, the response is “pleasure.” The follow-up questions should then be: “How long do you anticipate owning it?’ Then, “What, if any, growth rate do you expect on the value of the home?” Very rarely are there “rational” responses like “20-plus years” and a “5% or so return” (which is the approximate national residential 20-year average rate of return for a home).
Many buyers anticipate that the value of their second home will double, even though they say it is not an investment.
Often clients will buy on emotional and perhaps irrational factors. They will also base their decisions on some misguided information or misinterpreted facts. The following are some of the more common misconceptions:
A vacation home is a vacation home. A vacation home can be categorized in three different ways: personal, rental, and dual purpose. The one that pertains to your individual circumstance will depend on the days used and the days rented.
I always can deduct my mortgage interest on my second home. With so many affluent clients purchasing McMansions these days, it is not uncommon to see a large mortgage on their primary residence. Remember that you can generally deduct qualified residence interest on up to $1.1 million of home mortgage debt ($1 million worth of acquisition debt on up to two homes plus $100,000 of home equity debt on up to two homes). Any excess interest on home mortgage debt is generally nondeductible. Furthermore, the owner’s overall interest deduction may be lessened due to the itemized deduction phase-out rule for higher-income taxpayers (for 2007 the AGI level is $156,400). This rule is expected to sunset by 2010. As such, if nothing is done, in 2011 it will revert back to full phaseout. (Now there are legal methods that we use with our clients that allow them to deduct interest on well above the $1.1 mm limit)
I always have to report rental income. Rental income is completely tax-free for property that meets the rules for personal-use property, but has a very limited opportunity to generate rental income (generally 14 days or less). From a tax perspective, this can be quite a boom for clients with properties that can be rented at an exorbitant rate for a short time (e.g., properties located near a major golf event, Olympics, or Super Bowl location).
Vacation home donations are always a good idea. Unfortunately, the IRS considers vacation home donation days as personal use days, not rental days, since the owner did not receive a fair market rental for the use if the home. In addition to not qualifying for additional rentals expenses, the owner receives no charitable deduction for donating the use of the home to charity.
I can use the capital-gains tax exclusion ($500,000) upon sale. The exclusion applies only to principal residences.
A 1031 (tax-deferred) exchange can be done on a vacation home. A recent Tax Court ruling (Moore, T.C. Memo 2007-134) disallowed tax-deferred treatment for a personal vacation home. The court held that a couple’s exchange of vacation homes did not qualify for like kind exchange treatment because the homes were not held for investment purposes (as required by § 1031(a)).
Rental income will be offset by cost. With property prices still high, some clients may believe they will offset the cost of a second home by renting it. Unfortunately, clients forget that in order to cover their costs they often will have to rent it out at peak season, coincidently the weeks they want to use it the most.
This is a “business.” Many people say they manage their property and thus “materially participate.” In other words, they are in the business of renting real estate and are able to take losses against other taxable income.
You can go home again. And, finally, do not “impulse buy” while enjoying a vacation. If you have an interest in purchasing real estate at a great place where you vacationed last month, I suggest that you hold off until you have “felt out the neighborhood” for a while, meaning you should visit the location a few more times. You should focus on the commute to work, the community, people, activities, and amenities, and, very important, talk to as many locals as possible, particularly those who have owned vacation homes there for some time. Do you have a similar feeling of happiness each time you visit the location? Are your experiences consistent over time?
The financial ramifications as well as the emotional toll of purchasing vacation homes can be complicated. But understanding these rules and your expectations will open the door to some great discussions with your advisors.

There are multiple ways to teach your children about money. You do instruct them every day simply by your examples. It is a silent but very informative teacher to your children.

Do you, without any thinking, give your children not only money when they want or buy them whatever they want and whenever they want it? The lesson taught to them: Life is easy I can have whatever I want with no consequences. With this approach who is going to be disappointed later in life?

I remember, very fondly, going to the Savings Bank every Friday night with my Dad. He put his savings in as the first expense out of every pay check and taught me that valuable lesson that I still carry on today.

Many of my clients have set up “weekend lessons” with their children. When the kids are say 7, 8, 9, or older they pick an amount of money…say $50, $100 or whatever to be given to the child. The child is responsible to buy/spend whatever they want from that money. This is not just for or on themselves, but rather, interact as a family for the entire family. Once the money is used up then everyone is to go home and there is no TV or games to play for the rest of the weekend so budget the money carefully. Some kids are given the money on Friday evening and within a few hours all of the money is gone. Boy, is it a long weekend sitting around looking at their parents, talking and with no games or TV until Monday morning. What a lesson builder of life!!

In other consults, we do an exercise and ask the kids to choose from three options when they’re grown up: (1) not having enough money to live comfortably and do for others, (2) having just enough to live comfortably and do for others, (3) and having more than enough money. The point is, if you never choose that third option, you’ll wind up as one of the other two. We all want things and we all make choices, but there has to be some fire in our choices.

In my opinion, children should not be paid for being a contributing member of the household. No allowance for chores. I suggest to parents that they actually “run the money” through their children. It costs something like $270,000 to raise a child to age 18. (Not counting college costs) Why not let them make decisions on half that money? The clothes, the music lessons, the trips, the books, the school decisions. You need new soccer shoes to further your athletic goals? Oh… but you just spent that money on a new outfit. It’s essentially saying kids, “We want you to be financially responsible and now – guess what – you’ll never have to ask us for money because we’re going to give you what you need and let you budget it on yourself.” What an incredible experience that would be.