Column: New tax laws may kill the beach house dream

From Reuters - January 3, 2018

CHICAGO (Reuters) - Dreaming of a beach house? You might want to think twice about that, given tax changes that just kicked in will make owning a vacation home more costly and may tank the resale value of the second-home market.

Prices could drop about 10 percent in some markets, said Zillow ( economist Aaron Terrazas, with pricey coastal areas the most vulnerable.This will not be good news for owners in popular areas who have already been waiting a decade for prices to recover the value lost during the housing crash and recession.

After the 2006 housing peak, prices dropped more than 50 percent in many popular vacation areas, and remain far off those highs. Zillow data indicates homes in Fort Myers, Florida remain 24 percent below the pre-crash peak, and Ocean City, New Jersey is still down 19 percent despite the draw of beach communities.Overall, purchases have been declining for three years.

Researchers from Gallup Inc to the Urban Institute have traced slower home buying to multiple factorsfrom difficulty getting mortgages to the uncertainty that an expensive investment would appreciate enough to make a purchase worthwhile.


The new tax rules will have a big impact because many second-home buyers are middle-income households, not the super rich, and even a shift of a few thousand dollars can greatly affect affordability. The median buyers household income in 2016 was $89,900, and only 34 percent of buyers had household incomes over $100,000, according to the National Association of Realtors (NAR). Almost three-quarters used mortgage financing.

While second homeowners can still deduct the interest on new mortgages up to $750,000, experts predict that many people will no longer itemize their expenses on Schedule A. The new tax rules raise the standard deduction to $24,000 for a married couple, and this may be too high a threshold for many people to reach without being able to claim more than $10,000 in combined property and other state and local taxes.

Also, homeowners can no longer deduct interest on home equity loans. That is likely to hold back vacation home buying because many people use home equity on their main residence to purchase additional homes, said Zillows Terrazas.

When homeowners think about the long-term impact on their finances, the math becomes even trickier. People are looking at vacation homes as longer-term commitments than in the past, with the average buyer planning to own the home nine years compared with five years in 2015, NAR reported.


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