How would it affect your real estate investing if you could not deduct the mortgage interest on the property loan off your taxes each year? If you purchased one or more of your investment properties using a traditional mortgage loan, then keep reading. Looming changes to the U.S. tax code could affect your budget in a big way. If they pass, of course.
The Proposed Tax Code
A proposal presently before Congress would eliminate the mortgage interest deduction (MID) on second properties as part of an effort to simplify the tax code. This would apply to real estate investors currently taking MID on rental properties as well as homeowners taking MID on second homes or vacation homes. Presently, people can take MID on two properties up to $1 million in debt, meaning that you can deduct the interest on your two mortgages as long as they total less than $1 million owed.
Not surprisingly, this has a lot of second-home owners very concerned. It definitely affects real estate investors who are holding properties long-term and counting on the MID to keep their expenses at a certain level. Fortunately, if you already own a second home and are taking that deduction, even if the changes to the code pass you probably will be grandfathered in. Although anyone who purchases your property in the future will not be able to continue taking the deduction.
The Positive Takeaways
While the most obvious effect of this tax code change would likely be that owning a second home will become less expensive, there are some positive takeaways for real estate investors looking for solutions. For example, if fewer people own their own vacation homes, owning a portfolio of desirable short-term vacation rental properties might be a great way to generate income for an investor.
Also, some vacation-home markets could see a temporary depression of home prices, creating opportunities for investors looking for those rental properties. Brian Koss, executive vice president of lender Mortgage Network, said, “Your really high-end vacation areas aren’t going to feel the pinch…It’s going to be the Jersey Shore [that takes a hit].” Since these areas tend to be more affordable than the most exclusive markets, like “Aspen and Nantucket,” said Koss, a temporary depression in home prices and rising population of motivated home sellers could be an ideal mix for real estate investors ready to make a move fast.
N.B.: The proposed tax code changes also will affect how interest on home equity loans may be deducted. Currently, taxpayers can deduct the interest on home equity loans as large as $100,000. If the code remains unchanged (which, in all fairness, is highly unlikely) then homeowners would no longer have this option on future home equity borrowing.
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