Potential Impact of Tax Reform on the Vacation Home Market in South Florida

From Rhona Kirsner


The ongoing debate in Congress over tax reform could end up with changes to the tax code that will impact the real estate market. There has been much discussion about limiting the personal income tax deduction for home mortgage interest, and possibly real estate taxes paid by higher income taxpayers. On one hand, the need for increased tax revenue might lead some in Congress to limit home mortgage interest and real property tax deductions. On the other hand, there is a vast constituency in favor of keeping these tax incentives to encourage home ownership, and many commentators feel that the home mortgage interest deduction for a principal residence is safe for the time being.


However, the mortgage interest deduction for a second home might be a more likely target for Congress to attack. It is easy for a member of Congress to defend the deduction for a principal residence, but it is a very different thing politically in these difficult financial times to defend the mortgage interest deduction for second homes.


Under the current tax rules, a homeowner can deduct the interest on up to $1 million in mortgage debt used to acquire up to two homes. For example, if a homeowner takes out a $700,000 to purchase her primary home, she can still deduct interest paid on a mortgage of up to $300,000 taken out to purchase a vacation home. Assuming a 6% mortgage interest rate, she would pay about $18,000 in mortgage interest on her vacation home the first year. If she is in the top 35% marginal income tax rate, her tax savings on the mortgage payments would be $6,300 (the savings would be even greater when state income taxes are taken into account). So, a prospective purchaser of a vacation home would likely consider this tax savings when projecting the total after tax cost of buying a second home. Let’s also assume that the real property taxes on the vacation home would be $6,000 a year. Under the current tax code, the deduction for real estate taxes paid would result in an additional $2,100 in income tax savings to our hypothetical vacation home purchaser. The combined tax savings from the mortgage interest and the real property tax deduction would be $8,400 a year, or $700 a month. So if Congress decides to limit both tax benefits only to a primary hone, this might take quite a bite out of the vacation home market all over the country. 


That being said, there is reason to believe that the impact might not be as severe in South Florida as in other parts of the country. This is because many vacation homes in South Florida are purchased by foreign individuals, from South America and Europe. Since many of the these foreign homebuyers do not pay U.S. income taxes (they have to live here for a minimum period each year in order to become subject to our taxes), they are not motivated by federal income tax savings when purchasing their second homes.


But, for the prospective vacation home purchaser from the Northeast, the potential  new tax math of second home ownership resulting from possible future tax legislation needs to be taken into consideration when deciding on how much they should spend on an acquisition. Prospective purchasers should consult with their tax advisor for assistance in calculating the potential tax benefits of the purchase of a second home, because everyone’s situation is unique, and other factors might limit their particular tax situation, such as the alternative minimum tax, and the reduction of itemized deductions for higher income individuals.


Rhona Kirsner is a realtor in Boca Raton Florida


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