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.
As a result, Mr. Weiser says it is now more likely for his clients to encumber their vacation homes with a first mortgage. Interest on a second home is still deductible as long as the total amount of both mortgages doesn’t exceed $750,000.
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.
Article adapted by Robyn A. Friedman of the WSJ
