As Congress mulls over new ways to increase revenue, the mortgage interest deduction on second homes is seen as a likely target for elimination. According to some advisers, such a change could go well beyond just being another tax on the rich.
“I don't think most high-net-worth people even care about that deduction, but for some of the middle-class earners, the loss of that deduction will prevent them from buying a second home,” said Thomas Meyer, chief executive of Meyer Capital Group, a $560 million advisory firm.
“The pendulum has swung back to the old days to where you now need 20% down and great credit to get a mortgage, and I think people need all the incentives they can get to buy real estate,” he added. “I think it's a good idea to get rid of this particular deduction, and it has to happen eventually, but not right now.”
Part of what makes the deduction such an obvious target is that most people associate second homes with the ultrawealthy, a segment of the population that has become demonized by protestors across the country.
The fallout of such a cut, however, ultimately could trickle down to hurt all economic classes, according to Barry Glassman, president of Glassman Wealth Services LLC, a $450 million advisory firm.
“It could affect future prices of rental properties in markets where there are a high number of vacation properties,” he said. “We've already taken away people who don't qualify for a mortgage, as well as those who don't want to take the risk. Now if you end up ratcheting up the price because the interest can no longer be deducted, more people might consider renting over buying.”
As Mr. Glassman detailed in a recent article for Investment News, if enough second homes in certain locations are converted to rental properties, rental income in those areas could fall. Indeed, the New England states would be hit hardest by the elimination of the second-home mortgage interest deduction, according to his research,
Maine, Vermont, and New Hampshire, lead the country with the highest percentage of second homes at 16.4%, 15.6%, and 13.3%, respectively.
Over the past 10 years, Nevada had the highest percentage ramp-up in the number of second homes (up 100%), followed by Tennessee, Georgia, Utah and South Carolina. Those four states have experienced increases of at least 60% during the past decade.
As for clients, most advisers point out that the wealthy typically have more options than do the masses when it comes to something like financing a second home.
“A lot of times, you can just take out a second mortgage or even refinance a primary residence and take cash out to purchase a second home,” said Sheryl Clark, a fee-only adviser and owner of Sunrise Financial.
According to Mr. Meyer, most high-net-worth clients are not even able to benefit from the second-home interest deduction, because they are filing under the alternative-minimum-tax guidelines.
The import of such a tax change, however, would be clear — and that might have at least a short-term chilling effect on the second-home market, according to Scott Miller Sr., managing partner at Blue Bell Private Wealth Management LLC, a $270 million advisory firm.
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“Most of my clients would feel that the more money you give to the politicians, the more money they will spend,” Mr. Miller said. “With that in mind, I think in the short run, people will react negatively to eliminating the deduction.”
Clinton Struthers, owner of Struthers Financial Services, a $100 million advisory firm, has a similar take on the notion of eliminating the tax break.
“Of course I understand that our government is looking for ways to punish those terrible rich people, but I really think eliminating the deduction on second homes flies directly in the face of the government's grand plan to make every American a homeowner,” he said.
While there are no immediate plans to cut the deduction, Mr. Glassman said it does represent at least one tax break that the majority of Americans might think they could live without.
“Eventually, when Congress comes to some conclusions, there will be a list of things that can be cut,” he said. “And on that list, shortly after tax deductions for private-jet ownership, you'll probably see the mortgage deduction on second homes.”