GOP tax plan would erase tax deductions on lake homes

Dreaming of a lake place or a little cabin in the woods?

People who own vacation properties wouldn’t be able to deduct the interest paid on second-home mortgages under House Republicans’ proposed tax overhaul.

The loss of the deduction is one of several ways the House plan reduces incentives for U.S. taxpayers to buy real estate, according to the National Association of Realtors.

Terry Sullivan, owner-broker of Sullivan Realty in Spokane, was in Washington, D.C., this week to meet with U.S. Rep. Cathy McMorris Rodgers, R-Wash., about the House tax plan on behalf of the Realtors association.

Some of the proposed changes would have the greatest impact on Seattle and other high-priced housing markets, Sullivan said. The House bill’s plan would limit the mortgage interest deduction to the first $500,000 of a home loan, down from the current $1 million cap.

That would have an impact in Seattle, where the median home price tops $700,000, though less of an effect on Spokane-area homebuyers, since the median home price here is about $210,000.

But in the Inland Northwest, the loss of the mortgage interest deduction for second homes could be quite significant, Sullivan said.

Many local residents hanker for their own private beach or mountain view. The loss of the deduction would make second homes less affordable and less attractive as investments, Sullivan said.

Realtors also are concerned about the House’s proposed changes to the home sale exclusion for capital gains tax. “Some people call it the seller forgiveness tax,” Sullivan said.

Currently, if a couple has lived in their home for two of the past five years, they don’t have to pay taxes on gains from the sale of up to $500,000. For single homeowners, the exclusion is for gains of up to $250,000.

The House tax plan requires people to live in their home for five out of the past eight years to qualify for the exclusion. And the home sale exclusion would eventually be phased out.

“Say you’re an upwardly mobile executive and you are based in Spokane for two years, then you’re sent to San Diego,” Sullivan said. “This is hardship for people who have job transfers.”

The National Association of Realtors prefers the tax plan developed by the Senate, Sullivan said. It maintains the $1 million cap on mortgage interest deductions and retains the deductions for a second home.

Given time, “we’re hopeful we can get each of the houses to craft something that will be less harmful to the homeowners of America,” he said.