Out in the Hamptons, Wall Street’s favored beach resort on Long Island, brokers and buyers already have a workaround for a tax-plan provision under consideration in Congress that would take away the mortgage-interest deduction for second homes.
A client of Brown Harris Stevens broker Jessica von Hagn who works at a hedge fund decided to turn the vacation home he’s buying into an investment property by setting up a limited liability company. That will allow him to deduct the interest and earn rental income at the height of the season from the modern home on Bridgehampton’s Lumber Lane, with four bedrooms, three baths and a swimming pool on an acre of land.
For the buyer: problem solved. For the Hamptons market: more high-end vacation properties getting listed as rentals, more competition and, most likely, falling rents.
“If you aren’t able to take advantage of the mortgage deduction for your second home, you’ll see more people putting their homes on the market and the inventory will grow,” von Hagn said. “There’s only a certain number of renters every season and we just keep adding more and more inventory.”
In second-home markets across the U.S., from Cape Cod in Massachusetts to Lake Tahoe, California, brokers are bracing for a hit. A House version of the tax plan, passed by the Ways and Means Committee on Thursday, cuts the mortgage-interest deduction on second homes, and on home-equity loans, which buyers sometimes take out on their primary residence to pay for a vacation property. The Senate’s plan, details of which were released late Thursday, also does away with the home-equity deduction, but preserves the break for second-home mortgages.
Purchases Financed
Should the final bill eliminate the tax deduction for vacation properties, the workaround -- acquiring the home as an investment property -- changes the nature of the purchase for buyers, turning their vacation home into a business. Second-home buyers typically purchase properties within 200 miles of their primary residence, and 72 percent of them finance the purchase, according to the National Association of Realtors.
“It’s a shift from favoring owners to favoring landlords,” said Danielle Hale, chief economist for Realtor.com. “It adds rental inventory and reduces the time people spend at second homes potentially.”
If markets are flooded with properties for lease, rents will fall and so will values for those homes, she said.
The main focus of the tax debate on real estate has so far centered on mortgage-interest deductions for primary residences. The Senate version of the plan would preserve the existing write-off for up to $1 million of debt, while the House would reduce it for new purchases to $500,000 of debt.