By AnnaMaria Andriotis
Could tax breaks for second-home owners be on the way out?
In a speech on Sunday, Mitt Romney, the presumptive Republican nominee for President, announced that he’s considering eliminating or limiting the mortgage-interest deduction for high-income individuals. Second homes, which include vacation homes and investment properties, accounted for 38% of home sales in 2011, according to the National Association of Realtors. Roughly 502,000 vacation homes and 1.2 million investment properties were sold last year. They have made up the largest chunk of home sales since 2005.
Scaling back or eliminating the mortgage interest deduction would hit some states harder than others: vacation homes are most popular in states like Colorado, Maine and Michigan, as well as Florida – a key swing state in presidential elections. The removal of this deduction could result in fewer sales there, which could hurt any recovery in housing, says Stu Feldstein, president at SMR Research, a housing and mortgage research firm. “It’s a bad idea for all markets right now – what little activity is left on home sales is highly dependent on investment homes,” he says.
A Romney spokesperson says “Governor Romney is discussing some of the ideas he has to tackle the big issues facing America.”
Lured by cheap selling prices and growing demand for rentals, a growing number of buyers have been purchasing second homes and renting them. Sales of investment properties spiked 64% last year. (Sales of primary residences, in contrast, fell nearly 16%.) By purchasing properties that would have otherwise languished on the market, experts say investors have helped the housing recovery and that removing incentives to buy could result in lower sales. For its part, the NAR says it’s against changes that would undermine current law.
To be sure, it’s unclear how many buyers would be impacted by such a change. Forty-nine percent of investment home purchases made last year were all cash – meaning the buyer didn’t use a mortgage and is therefore not receiving a mortgage interest deduction. Also, all-cash purchases accounted for 42% of vacation home sales. Separately, Romney stated that the change would be geared toward high-income earners, but didn’t provide details on how that group would be defined.
Still, the elimination of this deduction could impact investment properties, says Keith Gumbinger, vice president at HSH Associates, a mortgage-data firm. For investors with mortgages, this deduction helps to lower the cost of carrying the property, so eliminating the deduction would make it less profitable. If the existing tax perk was removed, it’s likely that buyers will make lower offers on investment properties to account for the tax savings that they’ll be losing, he says. Lower selling prices would bring down values of surrounding properties as well.
Vacation home sales might be less impacted by the removal of this deduction largely because these sales tend to be emotional buys, says Gumbinger. They’re homes to relax with family and potentially retire in, so for high-income earners the loss of the tax perk might not change their decision to buy, he says.
Nevertheless, the debate on mortgage interest deductions will likely intensify in the months leading up to the elections as presidential candidates outline ways to lower the country’s deficit. And experts agree that Romney’s proposal could survive because it targets a small group of people — the rich who are buying second homes with mortgages — and could be the first step in scaling back this much-debated tax perk.