Want a Vacation Home? Check the Tax Laws First

Interesting issues to delve into before buying a home.  Smart tax planning up front will save many headaches down the road. – Dawn

The Tax Cuts and Jobs Act of 2017 is changing how buyers pay for that oceanfront condominium or ski chalet

Want a Vacation Home? Check the Tax Laws First
ILLUSTRATION: CHRIS GASH

Thinking about buying that oceanfront condominium or ski chalet? If you are shopping for a vacation home, bear in mind that the new tax laws may have an impact on how you choose to pay for that property.

The Tax Cuts and Jobs Act of 2017, passed by Congress in December and effective on Jan. 1, made some significant changes that may affect owners or purchasers of luxury homes.

The new rules limit deductions of mortgage interest and property taxes. They also limit the deductibility of interest on home-equity loans, home-equity lines of credit (Helocs) and second mortgages—loans that some homeowners use to tap the equity on their primary residences to pay for vacation homes.

While the new tax provisions don’t entirely eliminate the deduction of interest on Helocs, they limit it to situations where the proceeds are used to buy, build or substantially improve the home that secures the loan. So if vacation-home buyers use Helocs on their primary residences to purchase vacation homes, they can’t deduct the interest on the Helocs, according to the Internal Revenue Service.

Andy Weiser, a real-estate broker with Better Homes and Gardens Real Estate Florida 1st, in Fort Lauderdale, Fla., says that in the past, many of his clients from the New York area would take out a Heloc on their primary residences to pay cash for an oceanfront condominium.

Things have changed. “Heloc purchases have pretty much dried up since the beginning of the year,” says Mr. Weiser, whose clients typically purchase units that range from $600,000 to $1.2 million.

Of course, mortgage-interest rates—even those on a Heloc—remain historically low, so many homeowners, particularly affluent ones, may feel comfortable using a Heloc for a vacation-home purchase even if the interest is not deductible. For some, that may even be preferable to liquidating a portfolio to finance the purchase.

If you’re planning to purchase a vacation home, there are various ways to finance your purchase. Here are some things to consider.

• Pay cash. If you have the funds available, paying cash is a quick and easy way to finance a vacation home. It also gives buyers a competitive edge in many cases because there’s no mortgage contingency and, hence, no added risk to the seller that the deal will fall through. And, if you later decide to renovate your new vacation home and want to use a Heloc to pay for those costs, your interest would be deductible as long as the Heloc is secured by the vacation home, and total mortgage indebtedness on the vacation and primary homes doesn’t exceed $750,000, according to Edward N. Cooper, director-in-charge of tax services at Berkowitz Pollack Brant Advisors and Accountants.

• Mortgage the vacation home. According to Rick Bechtel, executive vice president and head of U.S. mortgage banking at TD Bank in Cherry Hill, N.J., many vacation-home buyers are applying for first mortgages to finance their purchases. At TD, there is no interest-rate difference between a mortgage on a primary or vacation home, as long as the vacation home isn’t rented out. But the underwriting guidelines—the down payment required, loan-to-value ratio and credit score—are tougher for vacation homes, Mr. Bechtel said.

For example, while TD requires a down payment of at least 10% on a jumbo loan securing a primary residence, a borrower needs a minimum of 15% for a vacation home.


• Consult experts in vacation-home financing.
 Before making your purchase, consult with a financial adviser and mortgage lender with expertise in financing vacation homes. Vacation-home buyers are in many cases high-net-worth individuals with complex financial situations, so they should check with an accountant or other financial adviser to ensure that they are structuring the deal the best way.

About Dawn O'Neal

Dawn O'Neal - WASHINGTON - Realogics Sotheby's International Realty - Managing Broker CALIFORNIA - Independent Broker~Owner~REALTOR® GRI, CRS, LTG®, RRC®, PMN® ASP®, e-PRO®, SRES®, CIPS, TRC®,SFR®, CHS®, CDPE®, Ombudsman and Trained in Negotiations & Mediation from Pepperdine University School of Law I have been self employed since 1975, a REALTOR® since 1990. I am a member of the Sequim Association of REALTORS® IN WASHINGTON and WAR® plus Santa Clara County Association of REALTORS® and CAR® in CALIFORNIA Plus NAR®. I work predominantly with residential clients, some commercial properties, 1031 exchanges, & extensively with Seniors. I have received many awards with RE/MAX and Realty World attaining both their top award of Hall of Fame & earned many designations. I love to work with clients in person or through emails & the Internet. Please visit my web page www.DawnOneal.com for a full profile, testimonials & my passion – Breakfast With Santa. My Motto - Exceeding Expectations - ALWAYS!
This entry was posted in Buyers, Buying a Home, Income Tax, Investment Properties, Investors - Investment Income, IRS, Lenders & Loans, New Homes, Property Taxes, Real Estate - Sellers & Buyers, REALTOR®, Second Homes, Tax Basis, Tax Reform and tagged , , , , , , , , , , . Bookmark the permalink.

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