Hedge Fund Homebuyers In The Hamptons Already Have A Plan To Game Trump's Mortgage Cap

One of the key changes in the House GOP tax bill was to implement a cap on home interest deductions to the first $500,000 worth of mortgage debt and eliminate  interest deductions from second homes.  Of course, given active opposition from some very powerful realtor and homebuilder lobbying groups, it's unclear whether the changes will find their way into the final tax bill.  But, at least according to Bloomberg, New York's "millionaire, billionaire, private jet owning" hedge fund managers aren't waiting around to find out and are already taking steps to game any potential tax changes.

Out in the Hamptons, Wall Street’s favored beach resort on Long Island, brokers and buyers already have a workaround for a tax-plan provision under consideration in Congress that would take away the mortgage-interest deduction for second homes.


A client of Brown Harris Stevens broker Jessica von Hagn who works at a hedge fund decided to turn the vacation home he’s buying into an investment property by setting up a limited liability company. That will allow him to deduct the interest and earn rental income at the height of the season from the modern home on Bridgehampton’s Lumber Lane, with four bedrooms, three baths and a swimming pool on an acre of land.


For the buyer: problem solved. For the Hamptons market: more high-end vacation properties getting listed as rentals, more competition and, most likely, falling rents.


“If you aren’t able to take advantage of the mortgage deduction for your second home, you’ll see more people putting their homes on the market and the inventory will grow,” von Hagn said. “There’s only a certain number of renters every season and we just keep adding more and more inventory.”


Whatever happens with the tax plan, the Bridgehampton buyer isn’t worried. He’s paying more than $2 million for his 3,400-square-foot vacation home, and though he’ll end up spending less time there than he had originally hoped, he figures the rent he’ll earn will more than cover his property taxes and help pay the mortgage.


Of course, it's not just the Hamptons that would be impacted by the GOP tax bill as brokers in second-home markets across the U.S., from Cape Cod in Massachusetts to Lake Tahoe, California, are bracing for a hit.

A House version of the tax plan, passed by the Ways and Means Committee on Thursday, cuts the mortgage-interest deduction on second homes, and on home-equity loans, which buyers sometimes take out on their primary residence to pay for a vacation property. The Senate’s plan, details of which were released late Thursday, also does away with the home-equity deduction, but preserves the break for second-home mortgages.

That said, realtors, like Tim Bailey in Cape Cod, will undoubtedly call on his powerful lobbying groups to preserve his livelihood which "relies on selling second homes."

Even before any change is passed by Congress, the possibility that the second-home mortgage deduction will be gone is already changing the calculus for some buyers, said Timothy Bailey, a broker with John C. Ricotta & Associates Inc. in the affluent Cape Cod town of Chatham.


Bailey said an agent told him that one of her deals, for a $1.5 million vacation property, fell apart over the tax plan.


“My whole living relies on selling second homes,” Bailey said. “Because it’s a discretionary purchase, if they lose that deduction, it might be more attractive to rent.”

Of course, as we pointed out recently, this is just more unwelcome news for realtors in a market where buyers favoring lower-priced homes, you know those shacks costing less than $2 million, continued to rise in the third quarter, according to the latest Douglas Elliman Real-Estate Report. This left the high end of the market in a double-bind as supplies of new homes hit the market while sales tapered off...

Purchasers agreed to pay more than the asking price in 10 percent of deals for properties under $3.3 million -- this quarter’s definition of “non-luxury” homes, making up the bottom 90 percent of the market, according to a report Thursday by appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate. It was the biggest share of transactions with bidding wars since the firms began tracking the data in the second quarter of 2016.


In their zeal for lower-end deals, buyers snapped up condos as well. Those units -- with a median sale price of $567,500 -- were available for just 97 days on average before going under contract, the fastest clip in six years of record-keeping. On the high-end, buyers showed less interest in acquiring luxury homes than sellers did in listing them. Inventory in that top 10 percent of the market jumped 22 percent, the biggest pile-up in two years.


“The market is looking towards those smaller, more manageable homes,” said Carl Benincasa, a regional vice president at Douglas Elliman who oversees sales in the Hamptons. “That’s certainly been a trend we’ve been observing.”

Meanwhile, the real question, at this point, is will this extreme show to aggression towards America's billionaire class be allowed to stand by the Senate?  What say you?