For agents and brokers with clients in the market for a second home, the tax overhaul may put a dent in their dreams, with rules affecting the ownership of second homes will look different in 2018.

The rules on deductions for owning a second home will change in 2018 once the just passed tax bill takes effect.

According to a CNBC report, the massive overhaul lowers the mortgage interest deduction to $750,000 from $1 million. That cap applies to all homes. The $1 million limit will remain for homes that were purchased before Dec. 15.

Agents with clients who already have a $750,000 mortgage and planning to buy a second home next year, they will not be able to deduct the interest on that loan, according to Tim Steffen, director of advanced planning at Baird Private Wealth Management.

Another tax change is the elimination of the interest deduction on new and existing home equity loans. The legislation also caps the deduction for state and local income taxes at $10,000.

Under current tax rules, about 44 percent of homes are worth enough for homeowners to take advantage of the mortgage interest deduction by itemizing their deductions, according to real estate website Zillow. Your clients should consider that the legislation may drive down the price of some real estate, according to Eric Hananel, principal at accounting firm UHY Advisors, NY Inc.

Markets that will likely see the most change in value are the ones where residents are more likely to use the mortgage interest deduction, according to Zillow. This includes pricey markets, including New York City and coastal markets.

Ultimately, clients shouldn’t base their decision on whether to purchase a second home solely on taxes.

Your clients should make sure they can afford the property and its maintenance and they also should be aware of any hidden expenses. Second homes often are in an area with a vacation-like atmosphere, which leads to higher costs, including fees for homeowner associations.

Lastly, tax rules are different for a rental property versus a vacation property. Mixing both could unwittingly put a client in violation of IRS regulations.

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