Blooming Sky

View Original

How Will Trump's Tax Reform Bill Impact NYC Real Estate?

NEW UPDATE as of Friday, November 10, 2017

Tax reform has been one of the key items on the current presidential agenda. With the House of Representatives under Republican Party control and a president who has been pushing for a simpler tax code, it was only a matter of time before we would find out what was in store.

2017 House GOP Tax Plan Impact on Real Estate

While some of the big ticket clauses of President Trump's tax plan include reducing the corporate tax rate to a flat 20% as well as simplifying the tax brackets for specific incomes, the biggest surprise was related to real estate holdings.

$500,000 Cap on Mortgage Interest Tax Deductions - UPDATED - READ BELOW

Under the newly proposed tax reform by Trump and the House, there will be a cap on mortgage interest that is tax deductible. Under current tax codes, mortgage interest is tax deductible on up to the first one million dollars ($1,000,000) on mortgages taken out on a property purchase. With the new 2017 proposal, the mortgage interest tax deduction will only apply to the first half million dollars ($500,000) of mortgage taken out for a given property purchase.

To explain this a bit more, when a buyer of a property takes out a mortgage, every month he or she will pay a combination of principal and interest as part of their mortgage payment. The exact amount of principal and interest paid is based on the interest rate, duration of the loan and overall amortization. The interest that is paid as part of the monthly mortgage payment is tax deductible. If you pay $20,000 in annualized interest, you're able to deduct this interest against your income, which allows you to collect a nice tax return at the end of the year. The benefits of home ownership! 

With the new proposal, the interest tax deduction is simply limited to the first $500,000 of mortgage taken out on a property. Let's say you buy a million dollar apartment (aka a million dollar listing), and you put 20% down, that means you need to finance $800,000. You'll be able to deduct the mortgage interest on $500,000 of the mortgage, while you won't be able to deduct the interest being paid on the additional $300,000 in mortgage. This ultimately means that your tax refund associated with mortgage interest may be lower.

We've seen numerous articles online misinterpret this clause by stating that homes more expensive than $500,000 or homes with mortgages great than $500,000 will not be eligible for any tax deduction. This is a complete misinterpretation of the new policy, which simply limits the deduction on the first $500,000 of mortgage taken out.

Note: Based on the final tax bill passed on 12/20/2017, this limit stands at $750,000.

Also, it's important to note that properties purchased prior to the passing of this bill will be exempt from this bill and grandfathered in through the duration of their homeownership.

$10,000 Cap on Local NYC Real Estate Tax Deductions

Another big benefit in the current tax code is that real estate taxes paid on property owned are eligible for tax deductions. The current proposal states that local real estate taxes are still eligible for the deduction, but only capped at $10,000. This means that if a buyer purchases a property and the annual real estate taxes are $15,000, only $10,000 will be tax deductible, while the other $5,000 will not be eligible.

Home Seller Exemption - $250,000 for Single, $500,000 for Married Couples

According to the Wall Street Journal, a popular deduction that allows owners of property who declare their residence as a primary home for 2 out of 5 years to deduct the capital gains is also set to change. Currently, if as a single individual, if you have gains of up to $250,000, they would be free of capital gains taxes. Same holds true for couples, with the limit maxed to $500,000 in capital gains. According to this new bill, the exemption still holds true, but owners will need to live in the property for 5 out of 8 years, which is a drastic increase in duration.

Note: The final tax bill provision as of 12/20/2017 still has this at 2 years. No change!

How will Vacation Home Deductions be Impacted?

Vacation home tax deductions are also being adversely impacted, as it is being proposed that mortgage interest deductions for second homes be scrapped all together.

According to a Bloomberg article about Hampton Homebuyers, brokers are helping their clients navigate around this issue by purchasing the properties through LLCs and turning them into income properties that can be rented out during peak season, and used by the homeowner throughout the rest of the year. Rental properties will enable the buyers to deduct the mortgage interest, while also capturing the benefits of property depreciation.

Is the new tax bill bad for NYC Real Estate?

New York City is one of the most expensive real estate markets in the country with exceptionally high real estate taxes. Given the lofty property taxes (unless the property is tax abated), combined with high property values, this component of the 2017 tax code reform may seem unfavorable. When the average apartment price in Manhattan is hovering around the one million dollar mark and climbing, it comes to no surprise that this may seem disruptive and maybe even limiting to the middle-class dream of homeownership. Why buy when you don't get all the benefits?!

Let us be first to say that this perspective would be shortsighted. New York City real estate is and will continue to be one of the biggest and best investments you can make. Whether you're buying as primary residence or as a pure investment, buyers won't be deterred by tax deductions that would save them several thousands of dollars a year on a specific line item. If a buyer were depending on a larger tax refund, then they likely wouldn't be strong candidates as property buyers to begin with. The biggest detriment may be the capital gains deduction which may be set to change.

Additionally, there will be numerous components of the tax bill that will actually increase personal deductions in other sections of the tax return, not related to real estate. Our assumption is that after all is said and done, this tax reform will have very little negative downside to property buyers in New York City. Don't expect property prices to dip or stagnate because of this. If anything, expect property prices to continue appreciating, as the stock market continues on a record run that will continue to have favorable conditions with the reduction in corporate taxes.

Currently, this is all a proposal, so none of these rules have been passed. Stay tuned for more updates.

For a great article that discusses the proposed GOP tax bill in detail, take a look at this article by the Washington Post.

UPDATE 12/03/17

The Tax Reform Bill, which previously made its way through the House was officially approved by the Senate on a 49 to 51 Vote. This is major news. As a confirmation to a prior update which was provided, the mortgage interest tax deduction will be the same as it has always been, available on the first $1,000,000 of property financing. 

Only significant impact will be the $10,000 Cap on the SALT (State and Local Tax) Deduction

This means that you will only be able to deduct the first $10,000 of real estate taxes. This will only impact the luxury high-end market in NYC, where taxes are above this threshold. However, as mentioned above, buyers will not be deterred by this, as the luxury market does not thrive on people seeking out several thousands of dollars worth of tax benefit. 

More coverage of the Bill being passed here: https://www.nytimes.com/2017/12/01/us/politics/senate-tax-bill.html

UPDATE 12/18/17

A revised version of the tax bill was just presented. The 2 year threshold on being able to avoid capital gains on the sale if a property is declared as a primary residence will stay. This is great news for anyone concerned that the threshold would be bumped to 5 years.

Looking to buy your first apartment in NYC? Make sure your read the First Time Home Buyer Guide.

Thinking it might be the time to sell for you? Don't hesitate to drop us a line or shoot us an email at info@bloomingsky.com


Advertising

Get your First Ride with Lyft for Free

Just download the app and use promo INSTA50 or click on the image below for a download link.