If you're one of the 10 million Americans who own or want to buy a second or vacation home, you may be interested in Henry Berliner's prescriptions for possible federal tax reforms this year: Go with the flow and keep taking deductions with PIP and IMP.
Berliner is the outspoken, innovative president of a $500 million-asset Maryland savings and loan association that pumps a lot of its funds into mortgages for vacation homes and condos. Rather than being cowed by the Reagan administration's tax-reform proposals sharply limiting interest deductions on second homes, Berliner has created two loan concepts that deal with them head-on.
The first is dubbed PIP, the "Primary Investment Program." PIP seeks to give home owners maximum mileage out of tax-code changes that leave mortgage-interest deductions on owner-occupied, principal residences unscathed while cutting back on deductions for nonprincipal homes. Under PIP, Berliner's S&L will turn your principal residence into a bigger deduction-producer by increasing its total mortgage debt and hand you the money to buy your beach house for all cash.
Here's how it works: Let's say that Congress and the White House curtail the ability of owners of second homes to deduct mortgage interest on their properties. Let's assume also that President Reagan and Congress keep their pledge not to limit mortgage interest deductions for principal residences, no matter how high the deductions go.
How do you afford a vacation home under these tougher tax circumstances? How do you recover at least some of the tax advantages currently provided through interest deductions on second homes, beach condos and ski retreats? Henry Berliner's answer is unequivocal: Shift your mortgage debt to the property that gets preferential tax treatment from the federal government.
Under his S&L's PIP plan, borrowers will be able to raise the mortgage debt level on their principal homes to as high as 95 percent of appraised value. The money that they pull out then will be used to acquire a new or resale second home at a cash price.
The total combined debt outstanding on the first and second homes won't be increased this way, Berliner noted. "The only thing that changes is where you're generating your interest deductions," he said.
Vacation-home buyers using PIP will qualify for financing up to $250,000, a fixed-rate mortgage at 11 7/8 percent with three percentage points at closing and a five-year "rollover" term. At the end of each five-year term, assuming the borrowers have kept current with their payments, the loan would be renewed for additional five-year periods at the then-applicable rates.
Stripped to its essentials, PIP involves a cut-rate, high-leverage second mortgage (or wraparound loan) on a first home to finance a second home. The lender would have security via a second lien on your first home, as well as the possibility of holding your vacation retreat as partial collateral.
As an example, let's say the current financing on your home produces mortgage interest deductions of $6,000 a year (a $60,000 loan at 10 percent). In the resale marketplace, however, your home is worth twice your loan amount, or roughly $120,000. The PIP plan might provide you additional, secondary financing of, say, $54,000 at 11 7/8 percent (producing early-year interest deductions of approximately the same level as your first mortgage, slightly above $6,000 a year).
That $54,000 in equity could be applied to an all-cash purchase of, say, a $70,000 vacation or second-home property. Rather than being denied or limited on your interest deductions for the second unit -- as under pending tax reform proposals -- PIP would allow you to take full deductions because all the mortgage debt legally would be on your first home, not your second.
Berliner's S&L, Second National Building & Loan Association of Annapolis, has prepared still another plan for vacation-property buyers after tax reform. Dubbed IMP, the "Investor Matching Program," the plan will seek to transform leisure-use second homes into 100 percent rental-investment properties, eligible for full mortgage-interest deductions and depreciation write-offs. IMP will use a computer to identify comparable-value resort units close to one another. Owners of "matched" units financed through IMP will offer them for rental throughout the resort season, and will rent from each other when they wish to make personal use of property.
Because the matched units and owner-to-owner rental payments will be essentially the same, it will be just like the situation before tax reform, Berliner said. According to his tax counsel, IMP participants should qualify for full mortgage-interest deductibility, just like any business-property owners.
Second-home tax reforms? If Berliner is typical of the creative real estate minds already at work, the next generation of loopholes could be plainly in sight before Congress finishes with the current generation.