Manhattan Inventory

In my opinion, low inventory, especially for pre-war co-ops, will continue regardless of financial downturns, upturns or otherwise, until the current capital gains tax is changed. We just sold a 7 room co-op apartment on the Upper Westside that we purchased in 1996. When we purchased our apartment, there was no capital gains tax on profits from the sale of residential real estate IF you rolled over your proceeds into another primary residence within 2 years of the sale. This was done away with in 1997 (along with some other exemptions). Now, the first $250,000 of profit ($500,000 for a married couple)is exempt from capital gains tax -- but you have to pay it on the profit over $500,000. This cap has not been increased since 1997 and it does not take geographical location into consideration. For most of this country, sellers won't have a capital gains tax issue. But this is not true for areas like NY, NJ, CT, MA, CA, for example, with much higher than average real estate prices to begin with and much higher appreciations over the last 10 years.

Quite frankly, I think part of the unprecedented gains in real estate values in these same regions has been fueled by the capital gains tax. Because more people will have a chunk of their profits eaten by capital gains taxes than prior to 1997, fewer people are choosing to sell their homes. Less inventory + same or increased demand = higher prices.

To give you an idea of how this works -- after 11 years, our apartment was worth 4.5 times what we paid for it PLUS all capital improvements. We will be writing checks to various governmental tax agencies (city, state and federal)for approximately $250,000, or 25% of our profit above our $500,000 exemption. This is on top of the $150,000 we had to pay for closing costs and brokers' commisions. That's $400,000 right off the top of our sales proceeds that we have left to invest in another property. That is a lot of money to "lose", especially when one wants to stay in Manhattan or the NYC area. If we were planning on retiring to a less expensive part of the country, then this tax bite might not hurt so much. But if you want to move to another area of the city or size-up,for example, then you probably, after crunching the numbers, will elect to stay put. End result -- less inventory, etc.

In all that has been discussed in the media about the super-heated real estate market in this area, I've not yet heard anyone raise this issue. Unfortunately, until this starts to affect other parts of the country, it's highly unlikely that the current capital gains tax structure will be changed.

constitutionally, taxes cannot be apportioned distinctly amongst the several states. This is a primary flaw in our constitution. Applies across the board.