Mortgage interest deduction - Senate Bill

"not a disaster" in the sense that the patient didn't lose both legs, just one. It's still a "screw you for voting for her" to New York and California ... what other possible justification is there for taking away the deduction for state and local taxes?

Ali, I agree that the coasts do not elect Republican senators and there is no one to fend for them in a Republican administration. I view local taxes as cost of earning high $ amounts. Fairer would have been capping the percentage of state and local taxes to some type of average in the country. That leaves people like me asking as to why the democrat voting states have such high taxes. Unfortunately, lower 85-90 percentage income people will not pay extra taxes due to an increase in the standard deduction. Hence, they will keep in voting for more welfare programs. Top 10 percenters of the coasts are theones getting screwed and many of them may be republicans.

"What other possible justification is there for taking away the deduction for state and local taxes?"

What possible justification is there for other states to subsidize NY taxes? Almost all economists agree that SALT deductions don't make any economic sense. The problem is that it was allowed in the first place, and taking it away now makes it tough on people who built their finances around the old system. That still doesn't make it a good policy.

And mortgage-interest deductions are even worse than SALT. If anything, they should consider getting rid of mortgage-interest and keeping SALT deductions, but that's likely political suicide.

300, the coasts do elect Republican Representatives, which is how you get to a situation where Nassau County Pete King and I are on the same side of an issue (doesn't happen often). Be interesting to see how this one plays out in reconciliation.

Thoth, I'm not a tax policy expert -- I sell co-ops -- but it seems like one justification is that, if you're going to raise the estate tax exemption (which helps wealthy people) on the idea that that money has already been taxed, then why do New Yorkers (admittedly wealthy New Yorkers, but also middle-class New Yorkers) have to pay Federal taxes on money they already paid to New York State? Isn't what's good for the goose good for the gander?

Ali, Senate is where taxes really get decided due to thin Republican majority. In the house, it would not matter if the coastal Republicans do not support the bill.

thoth,
1. Local taxes are a form of cost of living adjustment. Some one making $150k in NYC will not make as much money in Florida primarily due to cost of living being lower and as a result the same person would have been paying less Federal Taxes in Florida. Federal govt would have been a net loser.
2. Is a fairer way to look at per capita contribution per state?
3. Should the federal govt allow a fixed percentage of your income as deduction (rather than fixed $) based on average of all states? Say 5%? NYC residents will still be screwed but it will feel fairer.

At the end of the day, top 10% income earners are the one getting hit on the coasts and they can not do anything to reduce the local taxes as they just do not have the votes.

BTW, in my opinion, De Blasio is killing NYC with higher taxes which are going towards expansion of welfare programs (think luxury hotel stay for homeless rather than a residency check for min 1 year), generous employee benefits (that part I do not mind as much), and increased tax abatements for affordable housing. That is why Senate republicans do not have any sympathy for NYC. Top 10% percent get screwed.

Ali: why do New Yorkers (admittedly wealthy New Yorkers, but also middle-class New Yorkers) have to pay Federal taxes on money they already paid to New York State? Isn't what's good for the goose good for the gander?

You have to look at the reverse situation. If New York raises state taxes, NY residents don't actually pay for that full tax increase because they can deduct the state taxes on their federal returns. Instead, taxpayers in other states are in effect subsidizing NY. That's just as hard to defend for politicians from other states. Second, the estate tax debate is federal vs. federal taxation, so this is indeed the same party potentially taxing you twice. This isn't the case for state vs. federal taxes. FYI, I'm not defending cuts to the estate tax, just pointing out that this is the logical counterpoint to the double taxation argument.

Blue states tend to fund our own social services with our own state taxes.
Red states tend to have low/no state taxes and then fund various services with net federal tax rebates/subsidies .. coming from blue states. Lots of fun maps showing net fed tax paying/receiving states.
Further blue states tend to have higher costs of living, leaving an equivalent “class” in a higher federal tax bracket in blue states.. so the state tax deduction serves as something of a proxy to correct for this effect.

In any case, we can debate hypothetical logic to justify why GOP is doing this which is likely beyond the intellectual level of many in congress.
Obviously this is being done to hurt blue states. They don’t need or want our votes, and see this as a one time smash&grab before they lose seats in 2018.

Steve, Your point about republicans screwing the blue states is correct. However, many of the study which show transfer from blue to red do not adjust for retirement benefits such as Social Security and Medicare. If red states / Florida has more retirees who moved from blue states, they are are going to get more Fed $. Would love to see an analysis stripped out of these effects. I suspect, blue states (mainly California and NY) will still be donors due to high concentration of wealth.

@300_mercer

That retirement arbitrage is part of a lot of individuals budget calculus - blue states have higher taxes & better schools so work and live there until 60.
Red states have low taxes & terrible schools, so move there after the kids are done.

Removing the SALT deduction throws a wrench in a ~100 year old pattern, and to what benefit? To make it harder for blue states to fund their better schools? To make red state fed tax recipient states a bit fatter with a few more % of blue state dollars?
This goes in line with GOPs other attacks on education, such as making grad students tuition wavers taxable, etc.

Ex-Medicare/Social Security.. interestingly the numbers I see from numerous sources show "retirement benefits" as ~30% of NY fed spending and ~40% of FL fed spending and most states being somewhere in between. That is - it is not the primary driver of fed spending differences by state.
There's lots of other spending categories states like NY are losing on.

One report with some interesting #s, of course written from a NY perspective so..
http://www.rockinst.org/pdf/government_finance/2017-09-28_Balance%20of%20Payments%20Report.pdf

"However, federal procurement and wages in New York, per capita, are only about 50
percent of the national average, and direct payments for programs such as Social
Security and Medicare are only about equal to the national average. New York’s higher
grants are more than offset by lower federal spending on
contracts and wages, leaving New York with below-average federal spending per capita."

Steve, your retirement arb is very interesting. Just one more complication in this battle between red and blue states or as I see it, federalism vs. states rights.

Thank you. As per the link, the main driver of NY to Fed transfer is higher $ individual income taxes (that portion is unlikely to be biased), which is what I expected due to wealthier residents and higher incomes without adjusting for the cost of living. This clearly shows deductions are only offsetting a bit of extra payments by NY. I am guessing California is no different.

Hi,
just now biting the bullet and buying first apartment after renting for 20+ years ...oy.
Can someone please convince me that I'm not buying at the worst possible time, and that prices aren't going to get crushed?
thanks

You'll be just fine. Trying to time the property market is as foolish as trying to time the stock market. Just buy and hold, for a long time, ideally till maturity!

Tripled, Depends on your needs how long you are planning to hold it. There are some segments of the market - mostly new luxury condos - which are soft and you may be able find good deals. Next year may be even better deal. However, $1-2.5mm market (less than 1500-1700 per sq ft) in Manhattan is very strong and there is unlikely to be a correction any time soon due to limited supply barring a recession.

I think that anyone buying in any segment of the market is at high risk unless they know that they can have a 10-year hold period.

Hey 300_mercer, here are a few advise you should do ASAP:
> Prepay Q1 2018 state and local tax estimates by 12-31-17 (because of the State & Local Tax Deductions)
> Prepay 2018 property taxes by 12-31-17
> Those with second homes with large mortgages should consider refinancing
> Consider use of margin loans

I think whether a final measure will be enacted is uncertain and it’s also unclear as to when final action will be taken, which could impact the effective date of various provisions.

Regarding the Mortgage Interest Deductions:

In the House Plan :
> Mortgage interest deduction capped at $500,000
> Repeals ability to deduct mortgage interest on a second home
> Itemized deduction for interest paid on a HELOC is repealed effective 11-2-17
> Existing mortgage debt of up to $1,000,000 prior to 11-2-17 will be grandfathered

In the senate Plan:
> Mortgage interest deduction retained up to $1,000,000
> Repeals ability to deduct mortgage interest on a second home
> Itemized deduction for interest paid on a HELOC i

Regarding the Exclusion of Gain on Sale of Residence: both The Senate and the House are in agreement

> Owned & Used rules changed from 2 of past 5 years to 5 of past 8 years
> Exclusion can only be used once every 5 years
> Exclusion is phased out at a rate of $2 for every $1 that AGI exceeds $500,000 (Married) or $250,000 (Single)

Nicole
nestapple.com

300: Sorry for the long delayed response. Been meaning to reply back to your post above, but got tied up in a few things.

Re: local & state deductions. See my response to Ali. I do agree that some sort of mechanism like the average of all states might be a way to make this a better compromise. You also bring up an interesting argument about how the Federal government could be a net loser if someone has to move to a lower tax state, but people already move states all the time for various reasons today. I don't think removing SALT deductions will have that much impact on the margin to someone's decision to stay or leave vs. all the other factors already in play.

IMO, this has to be considered another headwind for a market that was basically flat and even declining in some segments. Think some people who recently bought are in for a nasty shock when they realize NY RE can indeed decline.

Agree, th. This tax law is just one more step toward a possible tipping point for this economy. Slowly rising interest rates, declining affordability, increasing budget deficits, increasing healthcare costs, increasing SALT payments may result in a shock the market once it all seeps in. Through in increasing infrastructure (subway) costs and possible outmigration from NYC. What else?

I am guessing one reason Congress does not care is that many will be retiring soon, moving through that revolving door and into a cushy private sector job with one of their political donors. It is not their country's welfare that they care about, it is their own.

ximon, All signs point to a booming economy. Real estate in NYC may suffer but I am not sure due to a large number of pass-through income entity and wealth effect due to increased stock prices which typically has a lag. I prefer to look at NYC real estate from a supply by "price per sq ft segment" point of view.

In case any one missed it, $750k is the new mortgage cap for new purchases.

The lower end condo market pricing should get a boost from the increased renter demand(investment potential) as a result of the standard deduction doubling. The 750k and 10k cap is meaningless for sub million market. Lower end coops will have no impact. The upper condo market >1m should also get a boost from increased rental demand. The 750k cap and 10k cap will impact slightly but the increased rental income will more than offset that. Higher end coops will be flat. So higher end coops flat and higher condo pricing stronger as a result of investment potential. In the end Condos win out for investment potential.

@SteveFR - what town are you discussing?

There is no real sub-1m Manhattan market and calling >1m the upper condo is a real stretch. >5m probably.

The corporate tax cuts mean more money for large companies, more bonuses available for execs, additional benefits for the wealthy that live off of pass-through companies. On the flip side, the $300-$500k W2 crowd may suffer as they are lower on the totem pole. I think we will see continuing widening btwn the upper middle and upper class.

300 has pointed the most important thing though that everyone tends to overlook, supply.

Also, spoke to my accountant today, cannot really prepay taxes for 2018.

To me, everything in the economy is interconnected. So problems with the high end of the condo market will eventually filter down to everything below. Yes, I suspect demand for rentals will increase but only at the expense of sales.

Our national economy has grown every month for 106 straight months, the 3rd longest expansion in our history. The average is 59 months. Unemployment is the lowest since 2000. Jobs have been added for 86 consecutive months, the longest streak on record.

Are we due for a retraction? Few predict a recession until it has already started.

Increased rental demand? Have you taken a look at how many new rental units have come on line and are going to come on line in the next few years? Have you seen the incentives landlords have been forced to dole out in order to get units rented? I think hoping that increased rental demand is going to bail anything out is a stretch.

Don't forget the vacancies from all the people moving to Canada.

Did a quick calculation on a $3.1mm home in Hoboken with $5.9k in monthly property taxes. With a 20% down payment, the monthly carrying costs are $13.5k ($17.6k property tax & mortgage minus tax deduction at 30% rate).

To get the same $13.5k monthly carrying costs without the deduction, the house would have to be purchased for around ~$1.5mm.

That seems pretty shocking to me. Do you mind sharing the details of your calc? Realistically, 20% down payment on a $3.1mn doesn't seem likely (should be higher), and are you phasing out the mortgage deductibility after $1mn mortgage?

In general, I think everyone has good points about 2018. There is a lack of consensus about this that I find interesting.

I am actually surprised to hear from some brokers (who are eternal optimists, as they should be) that the SALT deduction removal is a negative.

I did some rough #s on my forward taxes and I am roughly breakeven. Some of my friends and family members who are landlords in NYC also come out roughly the same. So a non-event for me, unless I am misreading it. But a small sample set, I know.

In my posts couple months ago I was a bit cautious about the NYC real estate market. Like many others, I didn't consider the tax bill being passed. Markets continue to be very frothy in almost every major asset class and that is not even including crypto which is all the rage at the moment. BUT there is no doubt that a tax cut for corporations to 21% is great for the stock market medium and long term. Employment is at a high, interest rate is still low even if its no long ZIRP, and consumer confidence is strong. Banks will make more money (less reg and rising LT rates even if curve is flattening at the moment) and lending will continue if not increase. There are no macro factors that are an obvious concern.

Tight supply continues to be the problem and I don't see that changing much unless we get more new inventory (which is more high end focused anyways) or people losing jobs and pay cuts in significant numbers.

That doesn't mean there won't be a stock market and credit sell-off early 2018 which will cause a softer 1Q18 and/or 2Q18 NYC real estate market. I'd be a buyer in a pullback.

I am not so sure about the NYC commuter towns. NJ cities and towns like JC, Hoboken, Maplewood, and Short Hills, for e.g. could be hit b/c of the high property taxes and the % that are owner occupied.

The bracket changes & AMT reduction makes the overall calculation quite a bit harder.
You can't simply compare carrying cost without including that the hypothetical buyer will have other offsetting tax changes.

Personally my initial calculation on losing SALT was about 2x worse than calculators & more in-depth analysis shows once you start looking @ exact brackets + AMT changes.
My taxes are still going up though.

I do wonder what this does to different areas that are more income vs real estate vs sales tax dependent.

It does absolutely change the rent vs buy calculus for new money buyers I think.

Most blue staters in the market for $1-3M properties will be negatively impacted overall.
Purchasers of higher end properties are probably not taking W2 income which is the most negatively impacted by these changes.

"Homeowners who sell their house for a gain will still be able to exclude up to $500,000 (or $250,000 for single filers) from capital gains, so long as they're selling their primary home and have lived there for two of the past five years."

Thanks for this update Nicole. Does anyone know if they also eliminated the

As for a correction in say Q2 2018, my fear is that this may be taken as a sign that the markets - both real estate and stocks) are overvalued resulting in panic selling especially in real estate which is far less institutional and less disciplined. Undersupply in mid-tier property may save us from a strong correction/crash but it is clear that there are many negative signals coming from the current markets. Enough to run for the hills? Perhaps not quite yet but I am increasingly nervous, in the middle of a renovation and hoping to sell soon.

Short-term, I am guessing that supply will shrink as owners contemplate the impact of the new law on their lives. Stock market may be happy for a while but the point has been made many times that this tax cut was priced into the markets a long time ago.

Sorry but hit the send button too soon. For Nicole or anyone else, what is the effective date for the capital gains exclusion provisions, specifically the reduction in the exclusion based on AGI?

I haven't read the tax legislation yet, but according to this WaPo article from yesterday, it looks like the capital gains exclusion provisions stay status quo (2 years out of 5).

https://www.washingtonpost.com/news/where-we-live/wp/2017/12/20/how-the-tax-bill-impacts-homeowners-buyers-and-sellers/?utm_term=.7ef26415a620

I'm still having trouble trying to figure out how this bill will increase renter demand.

30, the thinking may be that the rent vs. buy decision will now lean more towards the rent option. Of course, more rentals may enter the market if owners convert to pass-through entities and become landlords in order to take full advantage of the more favorable tax deductions for such structures. So it does seem like a big if to me. It does appear that demand by certain types of buyers and for certain types of properties may decline. Love to see a solid analysis.

While we are on the subject of analysis, what about those predictions of price declines of upwards of 10% for Manhattan properties? Hope Moody's et al will do an update based on the final language

In nyc, the supply trumps all. Many new developments need much more than 10 percent price cuts to move. Taxes for nyc residents below 400k are barely going up. Higher income buyers do not do as much buy vs rent. If the tax plan stimulates the economy and incomes, the demand for housing may increase.

Well, if what we are talking about is people converting to renters rather than buyers, I don't think that's going to save the market. Every year in Manhattan you've got ?80,000? New rental deals done an 12,000 sales deals done. So if 2,500 people convert from buyers to renters - and many of those won't be added to that 80,000 pool because that decision not to buy will simply mean "stay where they are" - butts let's assume they all would. You've got a 20% drop in demand on the sales side and a 3% increase in demand on the rent side (where tens of thousands of new rental apartments are coming on the market).

What effect is that going to have?