Sales of resort properties in this beach boomtown are lagging this spring despite the lowest interest rates in eight years, and real estate agents have fingered tax revision proposals as the culprit.
While a handful of agents report that sales are running about equal to last year, a majority of agents interviewed said their sales are down, some by as much as 50 percent.
"My sales are only half what they were compared to last year because prospective buyers are waiting to see what will happen with the tax bill," said James E. Tate, a real estate agent who, with his wife Mary Lou, owns Ocean Realty in Ocean City. "Investment properties have really fallen off. The ones we are selling are to people looking for a second home rather than an investment; but even those aren't doing too well."
Tax proposals moving through Congress took their toll on resort sales last summer when the House considered eliminating the deductibility of mortgage interest for second homes.
In response to that threat, real estate sales in Ocean City dropped 7.7 percent, down from an all-time high of $310.4 million in 1984 to $286.7 million last year, according to a study of Worcester County land use records compiled by the Baltimore-based real estate consulting firm of Lipman Frizzell & Mitchell. Figures for sales in Ocean City so far this year are unavailable.
While it now appears that Congress will not alter mortgage interest deductions for second homes, the tax bill the Senate approved overwhelmingly this week could severely limit the tax advantages of investment property, and that possibility has nearly stopped sales of resort homes to people looking for investments, some real estate agents said.
With mortgage interest rates tumbling this spring, real estate agents in the popular seaside resort area had hoped for brisk sales to make up for last year's diminished sales.
"The low interest rates have not really made as much of a difference as we had hoped," said Nancy Sharp, an agent with Johnston Real Estate Inc. in Rehoboth Beach, Del. "Most of our purchasers are looking for investment properties, and the uncertainty over the tax reform proposals has made people hesitant."
One real estate agent, Ralph Krum, owner of Ralph Krum Realtors, said that he had several clients who had signed sales contracts for condominiums in the Fenwick Beach area but later backed out because of concern that tax measures would affect their investments. Krum said his sales were down 35 percent this year compared with last year.
Under current tax law, owners of second homes can deduct the interest paid on the mortgage from their income taxes, the same as for first homes.
If the owners limit their personal use of the vacation property to 14 days a year and offer the unit for rent the rest of the year, they also can deduct operating expenses and depreciation. Under current law, depreciation for investment property is accelerated, which means that a larger percentage can be depreciated in the first years of ownership.
If a purchaser bought a typical $100,000 town house in Rehoboth as an investment, he could expect to deduct about 9 percent of the purchase price as depreciation in the first year as well as operating expenses, or between $10,000 and $13,000.
Under the House and Senate tax bills, however, depreciation schedules would be slower (only about 3 percent a year), and, under the Senate tax bill, owners of investment property would only be allowed to deduct real estate losses from real estate income, not general income. Under the Senate bill, the deduction for the $100,000 town house in Rehoboth would be limited to roughly between $4,000 and $6,000 in the first year. The two bills are scheduled to go to a conference committee of House and Senate members next month.
Many of the people who purchase vacation property along the Delaware-Maryland coast, real estate agents in the area said, are Washington or Baltimore professionals seeking to shelter their income, rather than investors purchasing large groups of units. With uncertainty about the tax bills, these buyers are holding back.
At Kings Grant, a high-priced town-house development near Bethany Beach, Del., sales during the past two years have been slow. Of the original 29 oceanfront units, priced at $355,000, 11 are left; of the eight bayside units, priced at $195,000, three are left.
"I do think people have sat back this season to see what will happen with tax reform," said George Keen, vice president of Wilgus Associates, a Bethany-based real estate company that has handled sales at Kings Grant. "Not knowing what the bill will look like has been the biggest disincentive."
At Eagles Landing, a town-house development slightly inland from Rehoboth Beach, project manager Harold J. Maloney said sales had not been as good as last year, again because of tax reform.
"Sales just haven't been what they should be," Maloney said. "People walk in and ask about tax reform. It's the unknown that scares them."
Tax revision may not spell disaster for the resort industry, however. Resolution of the debate, whichever way it is settled, could bring the market back, some agents said. At the same time, provisions in the Senate tax bill -- if they are voted into law -- could trigger a boom in the sale of second homes for people interested in resort property for their own use.
The Senate bill reduces the number of deductions for middle-income people, while retaining the deductibility of second-home mortgage interest, which could lead many middle-income people to take advantage of that one remaining shelter by investing in resort property.
Some agents, in fact, said that prospective buyers already have begun talking about purchasing for that reason.
"A lot of our clients are people looking for their own beach house, and they are tired of waiting around for a resolution of the tax reform issue," said Bruce Moore, a principal with Moore Warfield Glick Inc., an Ocean City real estate firm. Moore said his company's sales are slightly higher than last year; but he added that it is difficult to make a comparison with last year because the firm has more sales agents.
"Ocean City is very close to a tremendous number of people who can afford vacation property and just love the beach," Moore said. "The tax bill has created a holding pattern right now, but there's still a lot of good business down here."