Taxes and second homes

Castles in the Sand

By now, every homeowner should have had time to assess their tax position based on the Tax Cuts and Jobs Act of 2017 effective Jan. 1. If you haven’t, you have a lot of catching up to do, especially if you already own a second home or are in the market to purchase one. So, here’s a little review.

The interest on second homes is still tax-deductible as long as the total of the combined interest on both first and second homes does not exceed $750,000. The change for high-end buyers is that the deductible amount previously was a combined interest amount of $1 million.

The other change under the new tax regulations that could affect the second home buying market are changes to home equity loans and homeowners’ ability to deduct the interest on these loans. Previously, homeowners did not need to declare how the proceeds from a home equity line were being used. Frequently, homeowners would use the proceeds from these loans to fund the purchase of a second home. Now, however, the proceeds from a home equity loan or line of credit are mandated to be used to substantially improve the home that secures the line of credit or home equity loan in order to deduct the interest on the loan. Usually, it’s the primary home that is being borrowed against to fund the second home, which historically many Florida second home buyers did.

Despite this tax regulation, buyers may still decide to use a home equity line of credit or loan to purchase a second home, even though the interest will not be deductible. It may be to the benefit of the second home buyers to fund the property this way rather than liquidating financial accounts or obtaining another mortgage for the second home, which could put them over the $750,000 cap.

Depending on the size of the mortgage, a separate mortgage will probably work better for most buyers based on the new tax structure, especially considering that interest rates are still very low even for second homes. Naturally, cash has many benefits in a real estate transaction, especially since there is no mortgage contingency and properties can close faster. You always have the option of putting a mortgage on the second home down the road, which also would qualify you for a home equity loan on the second home at some point, all of which will be tax-deductible as long as you stay within the $750,000 limit.

We are, of course, talking here about high-end buyers with cash and the availability of other funds. With Anna Maria’s sales prices breaking into the $1 million dollar mark every day, we have a lot of second home buyers wanting to buy on the Island who are in this category.

This is something I wrote about several months ago when the tax bill was first signed, but I think it’s worth mentioning. There are economists that believe that reducing some of the tax subsidies for homeowners may actually increase the supply of homes that the market is struggling with.

The theory is if the demand for second homes goes down since there is less of an incentive to benefit from a tax write off, builders will start building more primary homes. In addition, they argue that some current second home owners might decide it’s more cost-effective just to make their second home their primary home, freeing up properties that will now be available on the market.

If you are in any one of these situations, you need to consult a tax expert and someone who is very familiar with second home mortgaging. My job is to make you aware of what could impact your decision to purchase a second home, and I hope I’ve done it.