Two Regulatory Trends That Could Trim Your Cash Flow

By Joanne Y Cleaver | Updated Aug 17, 2013 10:43 PM

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That sacred cow, the home mortgage deduction, is likely headed for the slaughterhouse. As Congress explores ways to raise revenue, analysts agree that the deduction is likely to be trimmed.

If so, property values could erode as much as 15%, warns the National Association of Realtors (though others believe the effect could be muted).

Get ahead before a reduced deduction becomes a reality by refinancing now, especially if you want to extract equity to finance improvements. Appraisers will have to take into consideration the ripple effect of any change in the deduction on home values, and that could undermine your future ability to get the financing package you need.

Second-home mortgage deductions are an easy target for fiscal reformers, but vacation homeowners face a double whammy. Many rely on rental income to cover the costs of the mortgage, taxes, and maintenance, marketing their properties through popular websites like Homeaway and Airbnb.

But backlash from annoyed neighbors, not to mention pressure from revenue-hungry municipalities, is teeing up industry support for regulations, licensing, and fees for short-term home rentals.

If you’ve been renting under the radar, chances are you’ll soon have to be paying for inspections, local fees, licenses and the costs of complying with newly developed standards for homes that are rented by the week or month. All that adds up to a big slice of the rental income and will be exacerbated by the scaling back or elimination of the mortgage deduction for second homes.

Ease your transition to this new scenario by gearing 2013 vacation home projects to comply with municipal standards for bed and breakfast licenses (the category of lodging most similar to short-term home rentals). By incorporating upgrades such as exit signs into your seasonal projects, you’ll be ready for those new regulations and can minimize interruptions to rental cash flow.

Read more on buying and selling homes, consider:

Biggest Bang for Your Buck? The Bath
Remodeling Heats Up: Trends for 2013
No Vacation: Tax Rules Tighten on Getaway Homes