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VIDEO – How the Tax Bill Could Impact the NYC Real Estate Market

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How might the tax plan effect the real estate market in New York City?  Sellers and Buyers are a mix of worried and excited.  For the most part, though, the New Yorkers who I work with just got a lump of coal in their stockings.  I am here to help you separate the noise from the news.

The tax plan’s three main impacts in New York will be these:

  • Mortgage interest is NOW only deductible up on new mortgages, of $750,000 or less.
  • We know New York City and New York State have high taxes.  NOW, State and Local Income Tax payments will NOT get deducted against Federal Income Tax Payments, resulting in a larger tax liability (SEE CORRECTION BELOW)
  • Real Estate Tax is only deductible up to $10,000 per year maximum.

Where do I see this affecting the New York City Market?

  • First, we will start to see properties starting at $1 million dollars affected, where a typical buyer will take a mortgage over $750,000 and no longer has as much of a potential deduction.  Since most buyers take a mortgage of 75-80% of the purchase price, this means a price point of $1mm or higher. 
  • Second, we will see properties affected that have more than $10,000 of annual real estate.  This is usually condominiums currently over $1.5mm and cooperatives over $2mm.
  • Third, high-earning New Yorkers, will see a meaningful increase to their annual out-of-pocket tax payments.  Even with a lower maximum income tax bracket.

If you are thinking of selling, you are smart to be reacting more quickly to these changes.

It is likely that we will need to see sale prices lowered to match reduced purchasing power.  If buyers have less money to pay for mortgages from higher tax bills, they will push back on seller asking prices.

Buyers have been pushing back on asking prices for the last 18-24 months, now they have even more reason to do so.

How far will market prices drop?  10%?  More?  In many cases, reductions seems to be a reasonable expectation, though prices have already been softening at higher price points and in certain neighborhoods for quite a while already, as I’ve been writing about for 18-24 months now.

I expect to hear from many of you to strategize about your plans to sell or buy as the tax plan becomes clearer.  We WILL get more detailed with you based on your specific situation.

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UPDATE: 

First, I wanted to make sure that it’s clear- I am NOT expecting a 10% decline in prices across the board.  Buyers will always want a better deal, but as prices have softened at the high end, I don’t expect such drastic price changes there.  And it’s not entirely clear that prices will move much, if anything, at the low end.  It’s likely most impactful in the $1.5-3mm price range.

ALSO:  A friendly attorney I work with wanted to point out that he feels I may have erred regarding SALT (State and Local Taxes).  Where I erred is in this:  In the event that your real estate tax is lower than $10,000, you could deduct the difference from your state and local income taxes.  So this could be a small win for those owners of 1- and 2-bedroom apartments where taxes are relatively lower.  However, I emphasize that’s it’s going to be pretty meager.

In other good news, which I missed, there may be another small win for investors:  Potentially, the depreciation schedule may have been modified for real estate from 27.5 years to 25 years, which would give investors a bigger write-down. So for a $2 million condominium, the depreciation deduction would go from $72,728 per year to $80,000. Of course that is for investors only.  (h/t: Thank you for a candy cane in my stocking, Steven Ebert of Ebert Lontok)

 

 

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