With the spring market underway, real estate agents, bankers, loan officers, and home sellers will soon get a feel for the impact of the tax reform law passed at the end of 2017. Or will they?
First the facts. Interest deductions for home mortgages were capped at $750,000, down from $1 million. While the National Association of Realtors (NAR) predicts that 95 percent of homeowners nationwide will never borrow more than $750,000, the median price of a home currently on the market on the Vineyard is in the neighborhood of $875,000, so the percentage of so-called “mega-mortgages” is almost certainly higher here. According to Jeanne Ogden at Martha’s Vineyard Savings Bank, the average size of a mortgage from their bank for a home on the Vineyard is $555,372.
Secondly, and perhaps of greater significance to the second-home marketplace, there is now a $10,000 cap on state and local tax deductions. While the average property tax bill in the various towns on the Island ranges from a low of $5,260 in Chilmark to a high of $7,412 in Tisbury, there are plenty of properties at the higher end of the price range with taxes in the tens of thousands. (The Island has relatively low tax rates, but relatively high property values.) In the highest taxed town, Tisbury, if your home is worth more than $1.1 million, you’re paying more than $10,000 in taxes. In Chilmark, on the other hand, your home needs to be worth $4.9 million to pay that much.
While reduced property tax deductibility is not likely to be a game changer for a significant number of year-round residents, it’s a potentially big hit for those with primary homes in metropolitan Boston, New York, or elsewhere with both high tax rates and high property values.
“I think it will hurt the under–$1 million second home crowd here,” said Lisa Stewart of Sandpiper Realty. “If you’re in a high tax area, you may be worried about where you’re going to get that second home down payment.” Of the 442 single- and multi-family homes sold here in 2017, 64 percent were under $1 million, with 13 properties surpassing $5 million and the rest falling between $1 and $5 million.
Others aren’t so sure. Polly Bassett of Martha’s Vineyard Mortgage figures it’ll be six months to a year before the impact of tax reform will be clear. Still, she doubts it will be more than a blip, particularly for the second homebuyer. “As far as the resort of Martha’s Vineyard being impacted, I doubt it,” Bassett said. “It’s a destination and will always be a destination no matter what people have to pay.”
At Cape Cod Five, Matt Burke, the CFO and treasurer, believes that while tax reform could impact some potential buyers, there are other, more significant influencers in play. “The dynamics that are more impactful are mortgage interest rates, supply and demand, and economic growth in the stock market,” he said, noting that homebuyers and those refinancing have enjoyed an historic period of low mortgage rates. Rates, it’s worth noting, are expected to go up, and the stock market...is anyone’s guess.
“It’s a little early to tell because the tax changes will affect different people differently,” added Richard Leonard, Cape Cod Five’s regional president. “The market here on the Vineyard and on Nantucket is very influenced by second-home buyers and retirees. And we have a growing population of seniors – baby boomers – who continue to move and select our communities as their primary residence. That’s not going away.”
Kimberly Angell and Donna Cummens, who own Vineyard Tax Matters, are quick to fess up that even they don’t understand the full impact of the new tax code yet. By press time, the Internal Revenue Service had not provided much guidance to tax professionals, let alone regular old taxpayers. “I would say in terms of personal residence, we have to wait and see how it shakes out because there are so many moving pieces,” said Angell. “It’s impossible to do a one-size-fits-all. It’s just so contingent on an individual’s overall tax picture.”
Still, neither sees it influencing the second home market. Angell figures on a $1 million loan, losing $250,000 of deductibility amounts to a $2,500 loss in tax deductions. Not chump change, but far from a deal breaker for anyone in a position to borrow that much in the first place. “You’re talking about the kind of people buying properties here; they’re already taking a million dollar haircut,” said Cummens. “I just don’t believe it’s going to stop someone from buying here.”
“And if it does,” added Angell, “they need more financial planning. The question on these types of sale is, ‘Is this a good investment?’ Real estate here holds its value. No one has a crystal ball, but it wouldn’t stop me.”
Plus, she pointed out, absent a general collapse of the national economy, the rental market looks to stay strong. “And you can make up any of that tax loss on a half a week’s vacation rental.”
