Taxes. It’s an oddly unifying topic; regardless of their political leanings and socioeconomic backgrounds, nearly every person can list their personal reasons for disliking our current tax system. For those in real estate, however, changes to our tax legislation hold professional importance as well; even a seemingly small change to the rules governing mortgage interest deductions can spell serious shifts in the real estate market. For those in my profession, maintaining a weather eye on potential revisions isn’t just pragmatic – it’s a necessity.
Earlier this fall, President Trump’s administration and House GOP members each posited new tax plans outlining major revisions to current policies regarding property and estate taxes, mortgage interest deductions, and state and local tax breaks. As might be expected, the public is split over whether the suggested edits would be beneficial. The suggested changes include: repealing the estate tax within six years, dropping the corporate tax rate to a flat 20%, slashing the mortgage interest deduction threshold from $1 million to $500,000, and – among other suggestions – capping property taxes at $10,000. For those in my profession, the question continually arises:
How will these alterations impact the housing market?
The answer depends on the market niche and customer base under consideration. For illustration, let’s turn for a moment to the high-end property market in New York City, where upscale apartments can and often do sell for above $10 million. Broadly speaking, high-net-worth individuals with the resources needed to buy these properties tend to own and/or work within large companies or have inherited wealth. If the new tax plan is implemented, those within this bracket can expect to retain considerably more income from their business holdings and pay far less on the property they currently own.
With this in mind, consider the impact of just the $10,000 cap on property taxes; according to Jerry Howard, the CEO of CEO of the National Association of HomeBuilders, over three million homeowners paid more than $10,000 in taxes in 2016 alone. Once the new limitations take place, we can expect to see redistribution of wealth as those in higher income brackets retain greater amounts of their wealth per year. These gains will lead to a positive upswing in the luxury housing market as those previously on the curb of affording upscale residences find themselves in a position to buy. On the other side of the negotiating table, homeowners looking to take advantage of the high market demand may choose to sell their high-end properties at a profit. Either way, the luxury real estate market stands to make significant achievements under the new tax plan.
This forecasts a sunny outlook for the luxury niche – but it may not stretch to cover all areas of the housing market, especially in New York. While the proposed tax plan will benefit the luxury niche, it may not do the same for those in middling income brackets. As I mentioned earlier, the new plan will cut the mortgage interest deduction threshold from $1 million to $500,000, and altogether eliminate local and state property deductions. This will make more difficult for middle-income buyers to finance their homes, possibly to the point of decreasing home-buying and ownership within the bracket. According to analysts at Wharton Business, states such as New York, Massachusetts, and California will be particularly hard-pressed given their relatively high home prices and state and local tax rates.
For now, it’s impossible to tell exactly how these proposed tax plans will impact the market in the long term. However, those of us in the real estate business will need to continue keeping our professional ears to the metaphorical ground, and critically consider the path proposed changes will set before us.