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?


ASACJon Countrybunkererd Sat, 11/11/2017 - 00:50 Permalink

Since Cohn and Co came our with their 'famework', I called this out for being a tax increase. Now it is clear that the 'upper middle class' is going to be soaked with loss of critical deductions. So in other words, we struggle for years to build a business only to have the government destroy us and protect the monopolistic market participants.

Thanks Trump. I'm so glad that I went to the mat for you.

In reply to by Countrybunkererd

shimmy Fri, 11/10/2017 - 19:54 Permalink

I'd love to see what political party these people belong to. I'm guessing they're dumbocrats who go on about taxes needing to be higher for the wealthy yet when faced with that possibility, they will find ways to get around it. Love the lefty hypocrisy. Such virtue signaling twats. 

tion Fri, 11/10/2017 - 20:45 Permalink

Sounds like a good plan to me.  Taking a big fat liability that is making you bleed and turning it into an asset sure has a much more appealing sound to it than grown ass men crying about their property tax rates and losing their deductions.  Just sayin'.

FlKeysFisherman Fri, 11/10/2017 - 22:29 Permalink

I know a lot of rich people in California use a LLC to registar their boats. This way they avoid California's boat tax which is similar to a property tax. In other words it's the same old shit. The rich easily circumvent the tax laws and the rest of us get shafted.

Harry Lightning smrstars Sat, 11/11/2017 - 03:56 Permalink

Go live in California and the tell us how good your money making skills are. Or New York City and its suburbs. I read an article this week about a young fellow with a good job in technology in the San Fran area who has to live out of his car because he cannto afford the rents in the region.Housing affordability is completely dependent on location in America. And in an economy that barely offers wage increases greater than the rate of consumer inflation, its virtually impossible to for consumers to save much for a down-payment, When they do buy a house, they are spending a greater share of income to pay the mortgage and expenses than ever before in American History. So no, its not a matter of money making skills in a country where wages are held down by a number of factors completely beyond the control of the working class. This dynamic was the true cause of the financial crisis...when houses stopped going up in value, people no longer could tap their home equity lines to subsidize the differnces between incomes and costs of living. So they cut back on spendung and many stopped paying their mortgages. Nothng has changed, meaning that the same problems as before will occur again. Regardless of peoples' money making skills. You might have the finest money making skills in the world, but if you don't have the other side of the equation - rising wages - you will not be able to afford many items, including a house.

In reply to by smrstars

Harry Lightning Sat, 11/11/2017 - 03:48 Permalink

Another reason to hate this half baled attempt by the Republicans to reform the tax code. E;iminating the home equity interest deduction will make the cost of financing a child's college education significant difficult. Many families borrow against the equity of their homes rather than take student loans to finance their child's college education, since the interest on the home equity loans is deductible where it is not deductible on the student loans. Accordingly the cost of paying for a child's college education is in part subsidized by the government in saved taxes for the parents who borrow from their home's equityWealthy people are not affected as much as middle class people with the elimiation of home equity interest. Because wealthy people can tap their savings to pay for their children's education, where as few middle class families have the money in savings to finance that same education. The home equity loans have been a welcome assitance to the finances of the middle class, the people who supposedly are being helped by this tax reform package. Removing the deductibility of home equity loan interest proves this tax proposal is anything but helpful to the middle class. 

wally_12 Sat, 11/11/2017 - 09:09 Permalink

IRS only allows 14 day occupancy on vacation home rentals. After that, no deductions on interest.2 mllion dollar mansion with 2 weeks occupancy?

To Hell In A H… Sat, 11/11/2017 - 11:50 Permalink

Trump is the main man. This policy is typical of the policies the Trump administration, has formulated to help the middle classes. Trump just loves the little guy. Is there a bigger fool than the fly over states idiots who voted for the MAGA king?