Are your real estate clients considering buying a second home? Best to advise them to seek advice from a tax specialist before they (and you as their real estate agent) make a move.
The new tax bill comes with new caps on mortgage interest deductions (MIDs) that may affect your clients’ decisions about buying a second home. The new tax law to go into effect in 2018 caps MIDs at $750,000 for any home purchased after December 15, 2017. (Any buyer who purchased a home before December 15, 2017 can use the “old” tax law provision for MIDs up to $1M.) The new bill’s cap of $750,000 on MIDs applies to all homes owned by single/married homeowners.
If the homeowner, for example, has a mortgage loan of $750,000 for a primary residence and wants to buy a second home, that homeowner would be unable to deduct interest on a loan for a second house. “The MID cap of $750,000 is already reached on the first home,” said Tim Steffen, director of advanced planning at Baird Private Wealth Management.
If, on the other hand, that same homeowner has a mortgage loan of $600,000 for a primary residence and wants to buy a second home, that homeowner would be able to deduct $150,000 of the interest on the loan for a second house. Steffen also cautions that the new tax law completely eliminates interest deductions on new and existing home equity loans.
Another consideration to keep in mind, the new tax bill caps deductions for state and local income and property taxes combined at $10,000. Most people, according to Eric Hanand, principal at the UHY accounting firm,, purchasing second homes have already exceeded this $10,000 cap.
Another consequence of this $10,000 combined cap on state and local income and property taxes could be a mass exodus of people to states with no income tax (Texas, Florida, Nevada, Alaska, South Dakota, Washington, Tennessee, New Hampshire and Wyoming) and states with no sales tax (Oregon, Montana, Alaska, Delaware and New Hampshire.) Are you paying attention real estate agents who work in these states?!?
The new tax bill doubled the standard deduction to $12,000 for single payers and $24,000 for joint payers. Currently, according to the Urban-Brookings Tax Policy Center, only 28% or 49M people itemize their deductions on their tax returns. Urban-Brookings anticipates fewer payers will itemize now. The problem…the only way to take advantage of deductions for homeownership is to itemize deductions.
Additionally, second homes are often used as vacation and/or rental properties. Creedon points out that under the new tax bill, how much the owner of that second/vacation/rental property uses that property matters…a lot. Less than 14 days of use by the owner qualifies the property as vacation or rental; more than 14 days of use by the owner qualifies the property as personal or permanent property and therefore disqualifies that owner from deducting any maintenance expenses on that property.