Impact of new tax law on real estate values

Now that the GOP tax bill is now law, I thought it would make sense to discuss the repercussions of the law in a new thread. Above is an interesting taped interview from Dec. 20 with Jonathan Miller of Miller Samuel offering a somewhat negative take on the impact of the law on property values in the NYC area.

Equally interesting to me is the relative lack of analysis from our local brokerage firms such as Douglas Elliman, Corcoran, et al. Hard to find anything from these them but here is an interview with Howard Lorber, Douglas Elliman chairman from Dec. 19 offering a rosier but of course self-serving opinion.

https://www.msn.com/en-us/money/videos/wont-see-mass-exodus-from-nyc-after-tax-reform-douglas-elliman-chairman/vi-BBH1w3L

I think starting point of any analysis should a table of impact for NYC residents but I have not seen that. I have seen some poorly written articles which ridiculous charity assumption (5% of income) and understatement of NYC taxes (total 6-7%).

Single/ Married
#of Children
Income (W2)
Apt Value (say 4x)
mortgage 75%
Mortgage Rate 3.25% (average of 5/1 arm and fixed)
Property tax (~1% of value)
Charitable deduction 1% of income
Net tax Change

This table will show that under $300-400k, there is very little impact for a married couple but will appreciate some calculations from experts on this board.

Yes, 300 it would be helpful to see this analysis. I have seen something akin to it about a month ago but it was based on the House or Senate versions so not really applicable to the new law. It would also be interesting to see where the tipping points may be for declining housing affordability.

But just because one segment - e.g. higher wage income buyers - may be affected, it does not mean that pricing pressure could not trickle down. Are the lines drawn that solidly?

Miller makes an excellent point IMO that for people whose housing expenses increase as a result of the law but their after-tax income stays the same due to a higher standard deduction and lower tax rates, etc., buyers may not simply accept the trade-off. This makes sense as some people would prefer to see their tax refunds used for other purposes. This seems especially important for new buyers.

But he also makes the point that this change could take a few years to seep into market mentality and, if prices do decline, for aspirational pricing to become realistic pricing.

What he does not discuss, and I worry about, is that the law could result in higher SALT and property taxes for home owners, higher interest rates, lower consumer confidence and other repercussions. I think everyone agrees that these factors would result in downward pressure on prices across the board.

By many accounts, most people will not see any material difference in their taxes until April 2019 so perhaps little will change over the near term.

The New York Times posted an interactive graphic of 25,000 real tax filings redone with the current laws. It is filterable by a few categories such as income, # of children and living in a high-tax state.

https://www.nytimes.com/interactive/2017/12/17/upshot/tax-calculator.html

Of course it's going to take time. Look at the stock market crash of 1987. Prices didn't really start coming down until 1989, just much lower transaction volume. But then when they did start coming down, it was a pretty steeply sloped drop until a 1992 bottom. (At least that's how I remember it).

Here is a good calculator. For nyc residents, please adjust the local taxes for city taxes paid as the calculator does not fully factor that in. I tried a couple of high income scenarios in 750-1mm range and the total tax increase is only around 1percent of income. https://www.wsj.com/graphics/republican-tax-plan-calculator/

https://www.wsj.com/graphics/republican-tax-plan-calculator/
Here is a good one. Believe nyc taxes are not accounted for. It shows total tax reduction for a family making 500k owning a 1.5mm home with 15000 in property taxes and a mortgage.

https://www.wsj.com/graphics/republican-tax-plan-calculator/
Here is a good one. Believe nyc taxes are not accounted for. It shows total tax reduction for a family making 500k owning a 1.5mm home with 15000 in property taxes and a mortgage.

This suggests that in the undersupplied segment of $1.5-2.5mm 2 bed rooms at under 1500 per sq ft, the demand may increase.

At 2mm W2 income (not that many with that without other sources of income) married, 50k in property taxes, I am getting $25k increase. Assuming different assumptions, It could be $30k. 1.5 percent of income. Will hardly make a difference from total net income point of view. Of course, property taxes will hurt more.

I am starting to think impact of real estate is more of a hype. Supply and economy will dominate.

I agree that all the theoretical analysis in the world is not worth as much as factual data from buyers and sellers. However, the long-term outlook for the effects of this tax law - and other factors affecting the housing market - can cause one to rely on anecdotal information such as listing data and overall supply figures. So, if sellers start lowering their prices or withdraw their offerings, one might surmise that they are doing this based a new set of economics. Short of any consistent information from this analysis, one could rely on surveys of market sentiment. Value is really no more than a state of mind. I hope to see such studies in the near future.

But 300, why do you think we can segment the market in the way you suggest? I feel that disruption in one segment should logically trickle down to all others. Anyway, I agree that the new law, as written, seems far less bad for the housing market in NYC than previous versions of the bill.

Price per sq ft has a vast range from $1000 to $3000 leaving aside ultra luxury. Most of the supply from the new development in manahattan is in $2000-3000 per sq ft range as that is what it costs for a new development. There is not much in $1000-1500 per square ft move in condition in Manhattan market.

In past years, increases in prices above the $3,000psf level created more demand for apts. priced below this level. Why wouldn't this logic work in reverse? So as prices in the upper tiers decline, buyers would eventually be drawn to these upper tier units rather than units priced at lower levels. So the under-supply of lower-priced units is met with an under-demand for the same segment and all segments eventually end up stabilizing at lower price levels?

Price gap per sq ft is so large that the buyers are not fungible.

Product is completely different. One is utility coop / 60s condo with less light and the other is luxury condo with big windows.

Just like wall street trading MDs getting paid 30-40% less that the peak had no effect on what the entrance level analysts get paid (which is actually more than 2007 level). Blankfein makes $25mm vs $70mm at the peak. First year Associates makes the same or more (appx $200k per year).

i agree with 300_mercer, impact of real estate is more of a hype. Supply and economy will dominate. People will not relocate to Florida because their tax bill is 20k-40k$ higher when this represents 1-2% of their income when their kids are at school and they work in Manhattan. this will just give them something to talk about at their local country club.

But let's watch as taking the deductions away will be pretty substantial. If you own a $3 million property, you could be paying almost $90,000 in state and local taxes. With the $10,000 cap, that’s an $80,000 difference in your deductions...

Nicole
www.nestapple.com

I don't disagree that it's mostly hype. But in the real estate market in New York it's mostly hype that takes the market up and brings it down as well. The market is rarely rationally priced: when it's on the upside it's almost always overpriced and on the downside it's almost always under-priced.

I think it will take a year before we know and we will not be able to separate the impact of new supply from taxes easily.

I don't feel like there is much hype in this market compared to the early 2000's. I'm not on the front lines though.

I think all the hype is on downside right now driven by the reality of ultra luxury not selling. Excess supply is real but so is improving economy.

I had an interesting conversation with a tax attorney who was a part of the team at treasury that was working on GOP tax reform. He is completely apolitical and his only agenda was to do the best job he could on behalf of his country. Guy took a significant pay cut from his white color law firm just to be a part of this team. Intellectually this guy seemed like a superior creature, alien of sort. It was good to know that people like him still exist in this cynical, harsh political environment.
He had an interesting take on SALT. His thinking was that New York State will do something about state taxes resulting in its reduction. State doesn’t want to lose high income individuals.
look what happened in NewJersey after Tepper’s hedge fund packed up and left for Florida. Turned out his fund was paying 10% of all NEwJersey state taxes. No one wants to see that happening in New York. Politicians beggining to consider an mass exodus of high net individuals as a distinct possibility.

My guess is that there is a very large percentage of the buyers of ultra luxury condos that don't pay any New York state taxes to begin with.

Yep, 30. I know a few foreign investors who don't file federal taxes on their rental properties. When they sell of course they will get caught at least for capital gains.

Friend, Let us all hope that NY does something about the taxes due to fear of exodus. However, that will mean cutting the welfare programs and inefficiencies which is hard to do.

Or cutting NY taxes will mean cutting education. High-tax locales in New York are generally prized because they're good school districts. It's insane that private elementary school costs around $45K a year per kid, but NYC public schools are somehow considered to be "overspending" when they make do with $20K per student per year plus whatever their local PTAs can kick over.

Ali, unfortunately in nyc, where the total local and state taxes are the highest in the country besides California, high taxes have nothing to do with better schools district. Schools are not the biggest portion of spending in nyc.

http://www.ibo.nyc.ny.us/iboreports/understandingthebudget.pdf
Education is 28 percent. Social services are 18 percent. Do you know how that compares to a desirable suburb with good schools?

https://www.washingtonpost.com/news/wonk/wp/2014/05/23/the-dramatic-inequality-of-public-school-spending-in-america/?utm_term=.4b57b35266be

As far as I can tell, NYC plans on increasing property taxes 20% over the never 4 years.

Amongst the various inefficiencies, they need to pay for inflating the pensions by over time in the last few years by various city employees. I am sure we have all heard stories about $200k pensions for a low $100k job. We have heard stories about home less in $150 per night hotels. It all sounds like a very kind thing to do but some one has to pay for it and some of it is spending $s which otherwise could have gone to education. Politicians get away by making people like Ali believe that increases are all going to the education whereas the reality is different in NYC.

I think most of us will not have any problems if the property tax increases were earmarked for education in the area we live in. A better solution will be to take a voucher for 80% of the money the city spends on schools and go to a private school - no increase in taxes. Or allow more Charter schools like Success Academy who has shown that they educate the children in inner city better than public schools for similar money.

The charter schools won't solve the problem. For decades in public schools they have been taking problem/trouble students and placing them in Special Ed. While this solves the problem of them being disruptive it puts tremendous strain on the system because of the requirements of maintaining special education. The charter schools simply don't take these kids so they don't have the issue. But at some point the public school system is going to be left with only problem kids and having to spend tremendous amounts of money to try and educate them. (This comes from years of discussions with the half dozen or so Public School teachers/Vice principals/etc. In my family)

300: IMO, Pensions and Post-Employment Benefits are the time bombs for the NYC budget. Social spending is one thing, but at least it goes to current services and City Hall could always cut back if worst comes to worst. Pensions and PEBs are legal obligations without much flexibility.

30yrs: Why do you expect those increases to materialize? And how much of an impact do you expect on RE prices from them, all else being equal?

That's the increase that's in the NYC budget.

30, You have a good point about Charter schools and how they leave public schools will less capable students. Some people will view that as why should more capable kids be dragged down by special ed students. At least Charter schools (if they are good) provide opportunity to students who are interested and capable without extra cost to tax payers. Perhaps special schools with extra funding are needed for special ed as one bad apple spoils the basket but I am out of depth on best way to manage special ed.

thoth, You are right about benefits but it is much harder to control them than social spending as presumably the public employees somewhat factor them in when they decide to take up the jobs. However, one could get more out of public employees by efficient management, preventing pension abuse, and increasing the retirement age etc.
Social spending is a vicious cycle. The more you spend, the more people you attract from other parts of the country looking for free-loading. Eventually, people dependent on govt vote for a mayor who gives them more.
All the above spending comes at the cost of better schooling.

30: Thanks - just wanted to confirm that the RE tax increase you are seeing is predicated on an increase in rates, not just an increase in the expected value of the underlying real estate. If RE tax rates really are increasing by 20%, I'm surprised there hasn't been more chatter about it.

Tax rates are not increasing. For coop and condos, City just changes the valuation either using actually rental data, or by changing the cap rates or interpretation of rental data. Many properties are using “transitional assessed values” which are lower than “city assessed values” allowing the city to increase the values regardless of the actual market value as the actual market value is higher than “city assessed values” in most cases.

300, fundamental changes to assessment rules would almost certainly require new legislation at the state level. Given the inconsistent and regressive nature of the ad valorem system in NYC, it seems more likely that any budget shortfalls would be funded through higher NYS and NYC income taxes that would have the effect of reversing the benefits of the new federal tax law. Other alternative is for Democrats to gain control of both houses of Congress and simply cancel this law. Interesting to see which strategy will prevail. Nothing happens I think until a budget crisis looms and we see the results of the 2018 off-year elections.

I think real estate valuation and TAX system in NYC and SALT are separate issues. First one will continue to increase with or without SALT unless Republicans control city Mayor's office and State legislature. I do not see that happening.

The valuations, whether Transional AV, Actual AV, etc. don't really effect the total taxes collected, only the relative amount to other properties because the city backs into the annual tax rate by taking the amount of money they need to collect from property taxes and dividing by the total assessed valuations.

30, They do matter immensely as you can appeal your taxes based on those after the tax rate has been set. Tax rate does not change much yoy. City just moves the valuations to justify the taxes they need to collect but using the giant statistical calculator they have.

As a slight spin-off from 30yrs' point, since the city backs into property taxes by starting with the money they need, if we do have a year or two that's soft (from the point of view of there being few real estate transactions) then the city tends to make up the shortfall in transfer taxes by looking in the property tax bucket.

For condos and coops, city can just increase the cap rate if they can not justify the tax increase. You can only challenge the rent eqt and expenses. Up to 3 family houses have a tremendous advantage as the tax increases are capped by law and historic valuations are very low. Of course, if you build a new one, the low historical valuation advantage disappears. It goes back to my main point about the city spending being out of control which necessitates measures like this. Soak the rich and upper middle class (people making > 150-200k per year).

I mean decrease the cap rate which increases the valuations for tax calculations.

If there was ever a tax policy that needed reform, it would be the real estate tax system in NYC. In most jurisdictions, real estate must be assessed at a uniform percentage of current fair market value known as the equalization rate. In NYC, assessments are based on an income approach to value and the tax rates vary by property type. Also, taxes on 1-3 family homes are capped at 6% per year (8% for Class 2 buildings with 10 units or less) which further exacerbates the discrepancies between old and new construction and in comparison to other types of real estate. Commercial owners has seen dramatic increases in assessed value over the last few years with little relevance to actual market value.

And don't even get me started on Transitional vs. Actual AV's. Only thing to do is tear it the law up and start again.

Ximon, Tax policy clearly needs reform but it would not happen as the majority of voters benefit from the current policy. Commercial property and coop/condos, who are richer, suffer the most and they are in the minority. Think there is a Durst organization law suit about it.

http://www.crainsnewyork.com/article/20171115/REAL_ESTATE/171119932/new-york-city-property-tax-lawsuit-reaches-state-supreme-court

Yes, 300. A court challenge makes the most sense. Hope Durst can get a court will declare the real property tax laws in NYS to be unconstitutional as they are unfair, discriminatory and violate the concept of an ad valorem tax.

Does anyone have any articles about what the impact on property taxes would be if the city loses this lawsuit?

I have not seen any. My best guess is that if the city loses, the taxes for condo/coops/rental buildings may not increase any more where as Single Family may increase as the city needs revenues. However, I do not think much will happen with the lawsuit. Otherwise, it would have gotten lot more press.

Some of the most under-assessed properties in NYC are the townhouses in Brooklyn. In neighborhoods like Bed-Sty, tax law has kept some tax bills as low as $50 per month for brownstones worth well over $1 million. Mayer de Blasio owns two townhouses in Park Slope which have greatly benefited from this policy so don't expect much support from him to change the law.

" Also, taxes on 1-3 family homes are capped at 6% per year"
It's actually less than that because there is also a cap of 20% over any 5 year period.

Nice article that looks at it from multiple angles, but with little data (as usual)

https://therealdeal.com/issues_articles/tax-overhaul-for-better-or-worse/

Tax reform doesn't cap property tax deductions for investment properties right? So why would pricing on apts under $500k be affected? A buyer at that price point for primary residence use won't usually have income that will be substantially impacted by the SALT cap anyway. Rates are low!

What am I missing?

I think this thread is assuming the property is in Manhattan where most property prices are $1mm or above. You are right about $500k properties. The impact is minimal and if you make less than $150k, you net take home may be higher depending on the deductions or a lack thereof.

nothing fyshert...you are right on and not missing anything.

I may be assuming six degrees of separation but I don't think its as simple as knowing whether a buyer will have higher or lower after-tax income. Of course, potential buyers look at their personal resources in deciding how much to spend but buyers also look at overall market trends which include the impact of the tax law on luxury and second home properties.

What about the impact of changes to the tax treatment for second homes? Many pied a terres are not luxury homes but their values may be negatively impacted by the new tax law.

What about homes that are purchased all-cash and then later financed with home equity loans?

Also, I just don't buy the argument that there is a solid line between the luxury market and the mid-tier market or above/below the $500k mortgage. Why doesn't everything filter down?

Lastly, the long-term impact of this new tax law might be dramatic increases in local property tax or state and local income taxes. The impact here would be obvious, yes?

Where in Manhattan can you buy a $500k property? Does that exist? There are parking spaces selling for almost $1m.

anon...lol...very true....pretty much there is nothing below 500k especially condos.

$500,000 is the cutoff for mortgages, not sale prices.

I'm confused. Isn't the cutoff $750K ?

Yes, in an earlier version of the bill it was $500k cutoff and the bill that became law raised it to $750k.

Sorry. So assuming a $750,000 mortgage, that's a sale price of maybe $1,000,000-$1,250,000 which is not too far from market averages in many segments. So this tax law does not just affect the very top of the market. Although many or most of these same buyers may not see their taxes go up, the market may still see downward pressure on prices IMO.

ximon, This is really not about mortgage deduction. That is just a diversion for Manhattan as most buyers are used to being capped out on mortgage already. It is really about state and local taxes deductions. At the numbers you are talking about SALT deductions start to matter more.

True, 300. And in fact I think there are other more problematic issues occurring in the market than this tax law. But IMO there is a cumulative negative affect in play so everything matters.

For NY state to get around the SALT should be easy, unless I am missing something.

Just make the employer pay all of the state taxes and let them deduct them on their federal return. Most employees would be happy if their net income stays the same but their AGI is lower (on paper), as they will deal with less phase-out of benefits, yet they still receive the same take-home pay.

Additionally, the employer can deduct the entire amount without any cap (next round of the war in Congress they would probably go after that). As an employer, I would gladly do it, without thinking twice, for obvious reasons. I know they are discussing this but it will be interesting to see if they can get this idea through.

anonymousbk, might the IRS consider this payment of taxes by the employer as a form of additional income to the employee?

@ximon

My understanding is Congress would have to change the tax laws to do that. Remember employers already pay taxes that never show up on an employee's paycheck. For ex, payroll tax. Also, some states already have taxes that the employer's pay. It would not even show up on the employee's W2.

https://www.reuters.com/article/us-usa-tax-new-york/companies-in-new-york-open-to-new-payroll-tax-system-state-official-idUSKBN1EV04X

Main issue will be complexity in replacing net federal tax impact for individual in payroll tax. Of course, NY can lower the income tax by say 2% across the board for W2 income and incorporate 2% payroll tax. This will give a benefit to incomes less than $100k as their taxes have not gone up. For NYC residents, they would have to institute NYC resident pay roll tax. All very complex.

I am surprised why there is no discussion with concrete facts (rather than blaming unions etc, which may be true) on why per capital taxes in some states (NY) are higher than per capital taxes in other states (Texas). If any one has seen any research, will appreciate it.

Sorry per capita taxes

On the same topic of workaround proposals:

http://www.foxbusiness.com/politics/2018/01/09/new-york-california-among-high-tax-states-looking-to-evade-salt-cap.html

On the "why per capital taxes in some states are higher than in other states", you could look at
https://ballotpedia.org/Total_state_government_expenditures for the detail numbers that generate the levels of taxation. (one category that always dismays me: "state debt")

The root cause of "why" is harder, but I'd suggest it's the outcome of many years of ballot box results. Ultimately the question is: "Did you get the New York you voted and paid for?"

Thank you. I will take a look.

I think with the removal of the personal exemption and most SALT deductions, the mortgage deduction becomes more important than every to many tax payers (particularly families), losing the personal deductions will hit renters in blue states hard I think. People in the upper echelons of the market don't really care either way.

So, I'm not sure I see at $250K difference will depress prices, though it is possible that people with grandfathered $1 million limit may be less likely to sell, which would depress supply in the short term. But the interesting wrinkle is that because of the virtual eliminations of AMT, many people who never got ANY SALT deduction for property taxes will now get $10K. I'm not sure if that makes up for the interest difference on $250K and I'm too lazy to figure it out, but I'm going to guess that it does.

I actually think that many people making between $200k and $600k in NYC will see there taxes go down because of the elimination of AMT (particularly married couples and particularly with people who can exceed the new standard deduction via mortgage interest) and the very generous child tax credit (which doesn't even start to phase out until $400K in earnings. Almost none of the initial calculators or analysis took AMT into account, which is suprising since I think a lot of New Yorkers paid it and so never really got ANY SALT deductions to begin with. Now those people actually GET $10K in SALT plus Mortgage Interest.

Familyguy, $400-$600k is highly likely more net federal taxes if they own an apartment.

So, I actually think the tax benefit to owning has either stayed the same or improved under the new law for anyone who paid AMT, which is probably most property owners with any kind of mortgage.

I have run the calculations with various scenarios. Anyone making more than $400K was def paying AMT, which they are not now. When you triggered AMT you lost all your SALT deductions. We will be paying considerably less under this tax plan as will most families I know. Single people making that much is another matter..they will get hosed.

I would think getting the $10K a year in deductions is like getting an extra $250K in mortgage interest deductions at 4%

Unrelated to RE, the child tax credit is a major boon—$2000 per kid—phasing our at maybe $450k.

Remember a credit comes off your actual tax bill not your AGI.

It’s always useful to remember, whatever the posturing Republicans are not in the business of screwing over the rich (or UMC by NY standards).

I don’t know how the feds will pay the bills.
The whole thing seems utterly reckless.

Most of the online calculators and simulations do not factor in AMT btw

Familyguy, I agree. The AMT was the elephant in the room that the talk of SALT elimination ignored. I've talked to a few people who were pleasantly surprised at their projected 2018 tax bill.

Yes. I think the removal of AMT overwhelmingly benefited high-income blue state (add to that the more favorable brackets). I would not have voted for this tax plan or most of the people who passed it, but i’m puzzled by what a lousy job they did of selling it/explaining it. I’ve given up trying to explain the interplay of AMT and SALT not to mention the way the new minimum deduction makes real estate basically your only hope to itemize (unless you have some sweet pass through or you like to give $30k a year to charity (bless you, if you do)). I think a lot of people will be surprised next year.

Now, if the Democrats succeed in reinstating AMT (why they’ve made that a goal I cannot imagine given how unpopular it was) THEN NYC will suffer. And I say this as someone who has never voted anything but Dem in a national election.