Lessons on Taxation from Summers at Keuka Lake

I have two kids that were both born about the same time of the year.   This last summer my wife had the admittedly very good idea of planning separate parties on the same day for them. It’s genius in that you only have to prep the house one time for both birthday parties. A  quick change in theme is all you need for everything to feel special for each kid.  Since I knew we were going to clean up the house and we finally had it mostly finished I decided to invite some folks over for the pseudo housewarming I never had when we moved in two years ago.  This was also the motivation I needed to finally finish decorating the last room in the house which typically was the room that all decorators say you should do first: the master bedroom.  I themed the master bedroom after Keuka lake.  

I ‘themed’ it because I grew up in South Florida and consequently was influenced by spending several weekends at Walt Disney World every year.  Disney themes everything as a matter of corporate policy so when I think of decorating, my process is more about creating a feeling by telling a story through decor verses a more traditional approach using textures, colors, and patterns to invoke the emotion desired.  Since it’s the master bedroom it’s supposed to be an enriching and relaxing sanctum from the rest of the world.  I wanted the room to have a classic look and feel with a family orientation.   I was motivated to use Keuka as the theme because of the stories I had heard my whole life about the lake in addition to the personal experiences I had with the few trips up I was able to make over the years.    

What is Keuka lake?  If you are unfamiliar, Keuka Lake is one of the Finger Lakes in Upstate New York. They’re called the Finger Lakes because looking at a map, you can see they are separated geographically like fingers spread out from a palm.   The Lakes were all formed a millennia ago during the retreat of the glaciers.   This resulted in massively long and thin lakes which are very deep and surrounded by steep hills.  Even as it stands today Keuka is an incredible destination.  The deep waters provide for great fishing and water sports.   The hills surrounding the lake are ideal for certain types of grape farming creating a region famous for its wineries.  Hammondsport and Penn Yan, the towns on the Southern and Northern tips of the lake respectively have a turn of the century feel to them.      

The lake is surrounded by cottages, or at least they were cottages in my grandparents day.  These cottages were designed to be very small, usually with one bathroom and had insufficient heating and infrastructure for year-round living.   They were ideal for spending a few months at the lake in the summertime because most of the time was spent outdoors and people at the lake just used the cottages to sleep. It’s the same theory behind the design of other vacation destination housing like cruise ship cabins and beach front hotel rooms.  Today many of the cottages have been rebuilt or upgraded for year-round living and really should be considered lakefront homes.

My family has a long and storied history intertwined with the lake. This started with my great-grandfather who purchased a piece of property containing a main house and a few small cottages on it as well as a boat house.  There were cottages for each of my great grandparents children, who were of child rearing age themselves.  The basic premise was pretty solid as I understand it. My great-grandfather and great-grandmother would spend summers at the lake with their children who were mostly stay at home moms as was the custom of the age.  My great-grandparents were surrounded by their children (my grand parents generation) and their grandchildren (my parents generation).  The Son-in-law’s worked during the week and came up on weekends. This was no easy task as there weren’t any readily available highways that led to the lake so driving to the lake from their year round homes took the majority of the day.  Grandpa would drive up all day and night Friday, spend time with the family and fish on Saturday and Sunday, then drive home Sunday night.   

From what I understand spending summers at the lake was an adventure filled paradise for my parents generation as they grew up. The days were filled with swimming, fishing, water skiing, and everybody wasn’t just your best friend, they were family.  Each day was punctuated by huge Italian meals at the main house and sitting around campfires or playing board games at night. The kids clearly had a lot of freedom in an age where parents couldn’t comprehend things like car seats or being a helicopter parent.  There was even a bell that my grandparents would ring to call the unsupervised kids from all corners of the property to know when meals were ready.  It’s probably not a surprise that my parents generation would always speak with a reverence and wistfulness when the subject of the lake would come up in conversations. They spoke of their childhood adventures at the lake often, so often that I could write an entire book about the stories they told.  I am old enough to have actually visited the  property one summer when I was very very young.  I may have only been three or four years old at the time but it made the place ‘real’ for me in a way that the stories I was told over the course of my life couldn’t by themselves.  

After the death of my great grandmother I remember discussions about selling the family property.    My grandparents and great aunts would talk about distance, maintenance and taxes as the justification.   The distance was justified as the whole family had migrated to Florida by then to escape New York taxes and winter weather.  My dad’s generation was unsurprisingly very much against selling but they were in their early careers and managing young families themselves.  They simply didn’t have enough discretionary income to keep the property even if they worked together.  The surviving sisters which included my grandmother were very practical and wanted simplification.  To them the lake was a tool for something to use to keep the kids busy in the summer.  The kids were grown at that point and the lake was no longer convenient to go to.  It’s not a surprising conclusion if you knew my grandmother.  Even at my young age I remember feeling they were insane for letting the beloved property go.  I only saw the benefits of keeping it.  I wasn’t old enough to comprehend the validity of the elder generation’s concerns.  That being said I know they talked about oppressive taxes several times because I can remember it very well, more clearly than the other arguments.   The property was sold and the first era of the Lake was over.   Even though the property was gone, the mystique of the lake,  the uniqueness of the area and familial connections didn’t go away which is why I decided to use Keuka lake to theme my master bedroom.  Of course the process of finishing the decorating got me curious about the lake today.  It got me daydreaming about recreating the experience of my ancestors.  What if I could figure out a way to get my own happy place on the lake as an escape from the intense challenges of modern life?  I Started to look into it.   

The first thing that I noticed was that prices were insane.  The cottages / houses with waterfront started at $500,000. On top of the housing costs, the property taxes in many cases added half again to the mortgage.   Looking closer I noticed an oddity.   Crap cottages and really nice ones that were more house than cottage all were selling for roughly the same price.  Then it hit me.  These weren’t family cottages any more, they were businesses and valued at the rental income they could bring.   The nice ones just rent a bit quicker than the ugly ones but because of limited inventory they will all rent out.   All it took for a quick test of my theory was searching for Keuka Lake on VRBO.com.  There were so many ‘for rent’ cottages that I could barely see the shape of the lake on the map because it was covered by rental location pegs.  I don’t think this was always the case because I don’t remember my parents ever discussing ‘renters’.  They talked about the different families that would come every year but my impression was that these other families owned the properties and used them like my family did.

Like many, my dad’s generation did try to maintain a connection to something that was so important to them.  

Some members of the family would go up and rent cabins in the summer months for many years after the family property sale.   One did well in business and was able to get a nice place on the lake. Even my family member who did well for himself strongly lamented the challenges with taxation in a conversation I had with Him.  So how did this happen?  How did a community of summer cottages turn into a collection of independently run waterfront business in a high tax zone?  I’ve come up with a couple of theories.  

I have a co-worker who will always say something outlandish and then add “kidding, but not really.”   In that spirit, let me say this: one of the big reasons is Sex!  Kidding, but not really.  I had a great grandparent, and one of their children was Grandma Peluso.  She had three kids, one of which was my father.  My father and his siblings had an average of three kids each.   The math follows:  

• Grandparents generation: 1 family
• Parents Generation: 3 families
• My generation:  9 families  

Assuming the latest two generations are alive and are at the point in their lives to own property, we went from a single grandparent to a dozen families who would enjoy owning a cottage on picturesque Keuka Lake.  That is just my Grandmother’s tree. Remember she had four siblings, some had lots of kids, some didn’t.   Without doing an actual enumeration I can roughly guestamate that by my generation if we have 12 families that could own property and multiple that times the total number of siblings in my grandmother’s generation it’s  12 x 5 = 60 families on average who would probably all love to have a piece of ‘the lake’ all from a single household that started about 80 or 90 years ago.  Even if the average is lower, it’s not lower by much.  We may be very good at making more human beings but nobody is making any more lakefront property for those different human beings to own.   

On top of the practical supply and demand of humans vs. available space, there is also a cultural element. There is a hesitation on the part of a traditional community to allow more industry and business in an effort to keep that small town feel.  I see the same thing here in my home town.  This similarity between rural North Carolina and Keuka Lake is not the only one.  There are no Walmarts or strip malls close by the lake and no manufacturing plants that I can see.   Without these there is a limited tax base.  I know from my economic developers training that business generally pays $1.25 in taxes for every $1 that is needed for services.  People pay less than $1 for a dollar’s worth of services.  When there is no business, people have to pay it all. This is why taxes tend to creep up substantially when a city is mostly residential.  Is it any wonder then why much of the lakefront residential properties have converted to businesses?

Complexity of modern culture is the second huge challenge. The biggest drain on the local tax base is usually the community school system. We don’t just throw kids in a room with a blackboard any more.  In same way that we now have complexity in our households we have them in school.   Think about societal expectations today for average professional class families.  Nobody would bat an eye at a dual income family with multiple cars, bedrooms for every kid, and multiple electronic gadgets per person, like game systems, TV’s and tablets.  Schools have their own version of complexity creep including smart boards, developmental specialists, security and health personnel, etc.. This logarithmic increase in complexity adds associated costs.  Discipline cases today are handled by an IEP team with regular visits to a credentialed mental health professional.  This approach costs a ton more than a nun with a heavy ruler which is how things were handled when my dad was a problem child in school.  

So why bring this all up?  Well I opened my mortgage statement today and got the shock of my life.  Apparently after a new tax assessment on my property my escrow had to be increased so much that the mortgage payment went up by over 30%.  Assuming you follow the standard best practice of keeping a mortgage payment to 1/3rd of your household take home, then my total household bills just went up nearly 10%.  That’s a huge chunk for anybody to swallow in one day.

The thing is that this isn’t a cottage I can walk away from, although I have to admit that my first thought at seeing the massive number on the bill was to simply sell the house.  It is my home, a house that i’ve owned for such a short period of time I haven’t completely finished decorating yet, let alone getting all the things I want to get for it.  My wife talked me down from that ledge but we still have a problem to deal with, a pretty big one that was not of our making.  We discussed selling some things we own and would rather keep to mitigate most of the one time impact of the tax charge.  In her case she volunteered some jewelry she rarely wears.  In my case it was a box trailer that I don’t use much but which I love owning and is invaluable when you need it.  If we did that then our mortgage payment will only go up about 11% in perpetuity which is not pleasant but manageable.  

I could have been furious that I had little warning.  I could vent that in the digital age it’s incomprehensible that there were not red boxes on the mortgage interest statements giving me fair warning or a pop up window telling me what my projected mortgage payment would be once the tax notice came in.  I could say that it’s abysmal customer service to just send a letter with a new mortgage payment that is 30% higher without a personal ‘alert’ phone call that offers alternatives like the credit card companies do when they think your number is being used fraudulently.   In the end it doesn’t matter.  All the customer service and head’s up doesn’t change the reality of a world where costs go up quicker than incomes.  

Most of my family can’t afford to own a cottage on Keuka Lake, heck most of the ones in my generation can’t even afford to rent one for a couple of weeks.  The idea of a single parent working a stable job, paying for a family home as well small cottage on the lake is nearly laughable.  I guess If the average person really wanted it, they could play extreme financial defense to pull it off, but most don’t.  Peer pressure and shared values are tremendously influential in the professional class. Even if one spouse wants to live in a paid for mobile home or tiny house close to where they work and use the rest of the money for something like a cottage on Keuka Lake the other one may have different ideas.  

Now the cost of living creep has shifted the disconnect from the vacation home to the family home.   I guess that’s the point of all this.  Population growth and increased complexity are a few of the many trends that shifted Keuka lake from a magical world for parents to give their kids every summer to a relentless series of micro businesses where vacations are one or two week assembly lines and only to the well heeled professional.  Will that shift continue to happen in other parts of our lives?  I’ve made the case here that the new normal isn’t to increase our quality of life generation after generation, it’s to simply tread water and not lose what you have.   In my case it’s literally about keeping my home.   I can do basic math, I may make a little more money this year but it won’t come close to covering my additional mortgage payment. I was forced to consider the questions of What do we sell to pay the big initial tax bill and what do we cut monthly to meet the now permanently increased payment?  This isn’t exactly a fun conversation to have but it’s one that more and more people have every year.  

I may never be able to send my kids to Keuka lake to spend every summer and meet them on weekends, but maybe If i’m savvy I’ll be able to figure out this tax challenge with minimal impact to my life.  Hopefully I can keep this place long enough for my kids to grow up with all the benefits that this particular home in the woods brings.  I won’t be able to recreate the amazing stories of my parents generation, but i’m sure I can allow my kids to have a cool story or two for their very own.  Who knows, maybe if I can tread water long enough we can get back to a new normal where my kids and grand kids will have a better life than I have.  That would be the best story of all.  

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