Whenever making decisions concerning proposed tax changes, please consult with your accountant/lawyer/financial advisor. There are numerous proposed changes and each person’s financial situation is unique. These are our thoughts/opinions as professional real estate agents.
If the Mortgage Interest Deduction (MID) is capped at $500,000 per couple it will have an impact on buyers who require mortgages over $500,000. Those prospective homeowners with mortgages greater than $500,000 will lose part or all of the interest deduction between a $500,000 and $1,000,000 mortgage. Since the current tax law caps mortgage deduction at $1,000,000, or $1,250,000 property price at an 80% LTV, there is a limit to the amount of deduction that will go away.
If a buyer secured a 30-year fixed rate mortgage at 4% assuming a 33% marginal tax bracket the difference between the mortgage interest deduction on a $500K and $1,000K loan would be about $7,000 per year. After 10 years it would be approximately a $65,000 difference since the interest portion of the loan decreases over time. Again, this maximum loss would be at the $1,000,000 mortgage level and less, if a fraction of it. Clearly, the tax proposal hurts the New York City real estate market, but probably not to the reported extent. An economist at the Federal Reserve estimates that eliminating the MID would cause the average household to lose “…10.9 percent of the value of the property . . . “ Given that the average sale price in Manhattan in 2017 is $1.9 million and $856,000 in Brooklyn, we believe the associated effect will be significantly less. This belief is based on the fact that NYC is highly desirable and the tax friction cost drops significantly as the price of an apartment moves above $1,250,000. Additionally, we believe the proposed tax change to eliminate the MID on second homes will be de minimis in NYC. The American Community Survey (2011-2015) has the NYC area at 5% or less when looking at the percent of housing units for seasonal, occasional, or recreational use.
Homeowners will also see a pricing drag from the limit on exemption on the capital gains tax from the sale of a primary residence. If this is lowered from $500,000 to $250,000 and the years required in residence is increased, both proposals are a drag on property economics. Unlike the MID, this part of the proposal is not something that is highlighted each year. This pain is only felt when the property is sold and therefore we believe will have little impact on pricing.
The elimination of the deduction for state and local income or sales taxes isn’t directly linked to real estate, but there are ancillary ramifications. Two major things: first, relatively higher taxes without a tax deduction makes NY less desirable to live in when compared to lower tax states, and second, the buyer pool shrinks and those remaining have reduced net worth and reduced purchasing power. We do believe this could have a significant influence on the price of real estate in NYC.
The overall market has traded down in the last 18 months and prices are now between 2% to 20% lower. The price drop all depends on condo/coop, townhouse, outdoor space, neighborhood, accessibility to public transportation, etc. We are witnessing very few offers at the listing price unless we are in certain neighborhoods in Brooklyn or outdoor space in Manhattan. If the current House proposal or some version of tax reform takes place it looks like there will be a negative pricing impact resetting the entire market. This is both good and bad. Yes, it’s bad because the market most likely trades down. On the other hand, political/market uncertainty is eliminated allowing the market to find a new base and rebuild from there.