Tax Reform Seen as Blow to Second Homes

Second-home owners--about 4.5 million of them throughout the nation--face declines in property values and increases in cost of ownership if certain tax reforms are enacted.

Proposals now before Congress would mean that many of those non-primary homeowners would have to sell their beach houses, mountain cabins or desert hideaways or, if they rent the homes to others, boost rent prices.

Tough, you say, with little or no sympathy for those who are able to own a second home?

But the average market value of such secondary homes nationwide is estimated at $70,500 and 55% of the total number are valued at less than $50,000.

They are not all mansions and chalets, and by no means are they owned only by the wealthy, the Washington-based American Land Development Assn., proclaims. The trade and professional organization represents more than 800 companies which own, sell or develop recreational real estate and community development properties, including hotels, golf courses and ski resorts.

Any revenue gain from limiting tax deductibility on second homes would clearly be offset by drops in construction and jobs, the group argues, and reform of this kind will “shift the overall tax burden on to the shoulders of the middle class.”

Declining Revenues

John Wogan, a Denver developer and president of Counselors in Real Estate said: “Contrary to the Treasury Department’s prediction that the Administration’s tax revisions will produce positive revenue impacts, (our) study indicates that U. S. Treasury revenues linked to construction activity will decline by between $3.6 billion and $9.2 billion over the next 10 years under this new tax reform proposal.”

The land development association had commissioned three surveys to determine the impact of proposed tax changes on the secondary home market. Without the second-home ingredient--essential to construction of resorts--such projects would have to be abandoned; they would not be feasible.

Contrary to common belief, one study showed that second-home owners are not in the upper-salary brackets. The average annual household income at time of purchase was $37,000, and their current annual household income is $47,000. Also, 11.7% or 280,000 of the estimated 4.5 million beach/mountain/desert second-home owners have an annual income of less than $25,000.

Dumping of Homes

Survey respondents indicated another dire possibility, a sudden dumping into the market of non-primary homes that they no longer could afford to own. That’s what 16% of the responding owners said, predicting that about 920,000 homes would be put up for sale. In addition, 1.7 million second-home owners would increase rents to pass along their increased costs. If reform prevailed, 81% of the current owners said they would curtail any future realty investments.

The second-home construction industry would also suffer from the tax proposal, the surveys indicate, losing between 56,000 and 150,000 jobs over 10 years as construction dropped by between 14% and 35%. That would result in a net loss in second-home starts of between 14,200 and 36,000 units per year. The current housing start rate for second homes is about 105,000 units annually.

The data indicates that the average age of the second-home owner is 51 and that 1.4 billion of all the owners are retired.

Lobbying Heavily

Obviously, this association, builders, developers and the realty field are lobbying heavily against changes in tax laws which would change the status quo they prefer.

Testifying before the House Ways and Means Committee, John J. Koelemij, president of the National Assn. of Home Builders, left no doubt about that. He charged that the present tax package would result in rent increases, reduction of new construction by as much as 325,000 housing units in the first year, increases in unemployment, reduction in existing property values and increases in the post-tax cost of homeownership.

“It’s easy for reform advocates to promise to “cut taxes for all and restore simplicity,” he said. “These long-term negative impacts would more than offset any tax savings the majority of renter households might enjoy as a result of reduced tax rates.”

Reform is usually applied to correct faults and defects. Very apparently, real estate and construction industry leaders don’t seem to mind all those warts.