ASK THE EXPERTS | HOW HAS THE NEW TAX LAW EFFECTED NYC REAL ESTATE?

Trump’s Tax Reform and New York City Real Estate

 The Tax Cuts and Jobs Act signed by President Trump on December 22, 2017, has initiated numerous changes to how residential property owners can write off their local taxes and mortgage interest payments on their federal tax returns. It caps state and municipal property tax deductions on federal tax returns at $10,000, reduces mortgage interest deduction caps from $1.1 million to $500,000, and prohibits such deductions on second homes.

But what does this really mean for the Manhattan and Brooklyn real estate markets? Well, we’re here to ask the experts just that: does this new tax law have any effect on the real estate market here in NYC? Initial views on this were mixed, and current market trends reflect those prognostications.

The fourth quarter of 2017, when New York buzzed with a mix of suspicion and sanguinity about its native President’s impending tax overhaul, saw Manhattan housing sales activity at its lowest fourth-quarter total in six years, Douglas Elliman and Miller Samuel reported. This included a 12.3% sales volume softening from Q4-2016 to 2,514 closed sales from 2,868 in Manhattan real estate, an average sale price drop to $1,897,503—the first below-$2M figure in two years—and a 13.2% increase in luxury listing inventory to 1,439, the first increase in nine consecutive fourth quarters. To circumvent the lack of tax-write-off incentives for homeownership the Act would create, cash buyers purchased 51.2% of all co-op and condo units sold.

But why? These trends were due largely to the market cautiousness the Act’s reduction of tax benefits provoked in the minds of many buyers, Miller Samuel’s CEO Jonathan Miller told The New York Times in January. Our very own Steven James echoed this sentiment to Bloomberg and Newsweek: “The buyer is very worried about overpaying.”

The Brooklyn market fared a bit better, perhaps due to its up-and-coming status in New York’s higher-end real estate market compared to Manhattan’s long-established one. Brooklyn’s Q4-2017 closed with 2,627 sales, a 1.7% increase from 2,582 in Q4-2016, causing a 23.1% reduction in inventory over the past year. Brooklyn’s $948,706 average sales price was up 0.1% from Q4-2016’s $947,553, and its median sales price rose 2.7% from $750K to $770K over that period. Its luxury median sales price, however, went down 1.9% to $2.4M over that time frame.

Now let’s dive into the 2018 numbers. Elliman and Samuel’s Q1-2018 reports generally indicated continuation of these cautious trends. Manhattan’s home sales dropped 24.6% from 2,892 sales in Q1-2017 to 2,180, which included a 24% fall in luxury home sales. The average sales price dropped from $2,104,350 in Q1-2017 to $1,933,198 (slightly better than the Q4-2017 showing, however). Brooklyn’s market growth slowed its pace but remained strong: the average sale price reduced from $993,955 to $982,093. Then we have the luxury sales, where the median sales price fell 4.7% to $2.425M.

These reports painted quite a different picture from Dezeen’s rosy reportage that Manhattan’s high-end residential real estate market was “booming, thanks to President Donald Trump’s economic policies and tax cuts for the wealthy,” with a reported overall 27% sales volume increase by the beginning of March. Whatever truth those findings hold may be partly attributable to the downward pressure the market’s highest end was already under, pricing-wise.

Prices in the over-$8M+ market have dropped significantly over the past 18 months, possibly to move inventory faster in light of the Act’s diminution of homeowner tax benefits, even though many of these sales involve cash purchases that make the lowered interest expense write-off irrelevant. (In fact, 90% of Q4-2017’s over-$5M sales were cash transactions, Elliman reported.) To boot, some buyers are actually using Trump’s tax reforms to bargain down home prices so they hopefully won’t get socked with higher taxes once the sales are closed, The New York Times reported in June.

Manhattan’s individual neighborhoods varied in RE market sales percentages over the first half of 2018, most showing incremental increases. Downtown consistently held the largest share of the borough’s market, 36% in January and 40% by May. The East Side carried 19% in January and 20% in May. The West Side went up from 18% to 20%, Midtown increased from 16% to 20%, and Upper Manhattan dropped from 7% to 4%.

Brooklyn’s market softened slightly as well. Q2-2018 sales were 5.7% down from last year’s second quarter, from 2,845 to 2,683, the first such decline after ten consecutive year-over-year gains, though sales increased 11.3% from Q1. Inventory rose 18.5% from Q2-2017’s 2,257 to this second quarter’s 2,675, which was up 30.9% from Q1. This significant inventory expansion followed 11 consecutive quarters of year-over-year depletions. Median and average sales prices both dropped from Q2-2017—$997,654 to $984,047 and $795K to $780K, respectively—with very minimal differences from Q1.

With all of this data being enough to make your head spin, what does this mean to our buyers and sellers who are uncertain about the effects of Trump’s new tax law on the NYC real estate market? The answer is, of course, nuanced, like any complex market. Because of the multiple up-and-down pressures the real estate market must weather consistently, assigning responsibility to any individual cause, trend or force wouldn’t be fair and/or accurate.

“External influences outside of the vibrant city economy such as rising mortgage rates, the potential impact of the new federal tax law, and an unclear direction of the national economy have continued to remain a concern of market participants,” Miller reported in the Q2-2018 Elliman Report on Manhattan sales. Another external influence could be a predicted mass exodus from New York to lower-tax states like Florida, where “you can save a million [dollars] a year,” our own Richard Steinberg told The Real Deal.

So there you go. No omens of a recession or bubble-burst are on the horizon, but cards are being played cautiously in NYC real estate investment, yet with hopeful signs that Brooklyn could be a worthy “Trump” card for the homebuyer or investor. Looks like we’ll have to stick around and see what happens in Q3 and Q4.

Sources


Ask The Experts | “How will the tax reform affect buyers and sellers in a real estate market?”

With April right around the corner, and with the first significant tax reform passed since Reagan’s in 1986, taxes are on everyone’s mind. With good reason, as its implications could be significant, depending on your profile.

We thought we would take the time to outline the specific changes at play.  Note: this may be worth a forward to family and friends considering buying and selling real estate in 2018. Importantly, as you may imagine, none of the below will affect you when filing 2017 taxes as the new laws will be first applied in 2018 (filing in 2019).

*Please note that the opinions below are derived from our team brainstorming and analyzing together — the final outcome from these tax cuts is still under consideration and consulting a tax specialist remains the best route to take while tax planning.

So let’s take these changes one by one, and see what’s in store:

  • SALT deduction gets salty: The existing state and local tax deduction, or SALT remains in place for those among you who itemize your taxes, however with a $10,000 cap. As of this new bill, real estate taxes are now grouped together with SALT, and thereby also capped at $10,000.   Previously, you could have deducted an unlimited amount for state and local property taxes, in addition to income or sales taxes; alas, no longer (which has Albany scrambling to create fixes or legal loopholes to bypass this material added burden for coastal blue states, including classifying taxes as charitable gifts … stay tuned on this front)
  • Lower mortgage interest deduction: Those of you who already own a home, you’re in the clear and grandfathered in.  The new home buyers among you will only be able to deduct the first $750,000 of your mortgage debt, down from $1 million previously.
  • No more deducting moving expenses: You won’t be able to expense your U-Haul costs if you relocate for work (did anyone do that?) TBD on whether exceptions will be made for the military.
  • The corporate tax rate is coming down: The corporate tax rate has been slashed from 35% to 21% starting in 2019 – that’s material and has prompted many to call foul.   The alternative minimum tax for corporations has been thrown out altogether, prompting many to call a double foul.  The greatest impact will likely be on stock holders, as earnings are expected to go up as a result of these corporate goodies; lots of debate exists around how much this additional wealth will make its way to employee salaries, if at all.
  • The endangered species of the estate tax: Prior to this tax bill, a paltry number of estates were subject to the estate tax, with the first $5.49 million being exempt for individuals and a whopping $10.98 million of transferred assets exempt for married couples.  Now, those thresholds have doubled at $10.98 million for individuals and $21.96 million for married couples … so who exactly will be paying this?
  • Pass-through entities will also get a break: Pass through entities, meaning owners, partners and shareholders of S-corporations, LLCs and partnerships (who pay their share of the business’ taxes through their individual tax return) will now benefit from a 20% tax deduction.  Although the legislation includes a rule to ensure these owners don’t game the system, tax experts remain concerned about abuse of this provision.
  • AMT minimized: The Alternative Minimum Tax came about from the intention to ensure that people who receive lots of tax breaks still pay some federal income taxes; since, it’s ensnared many W2 filers, accused of taxing working income far more heavily than investment income (aka the truly wealthy).  While the AMT will remain in place for individuals, fewer people will have to worry about calculating their tax liability under the AMT moving forward, as the exemption has been raised by $70,300 for singles and $109,400 for married couples.
  • Tax bracket simplification? Not quite: Americans will continue to be placed in one of seven tax brackets based on their income, but the rates have been lowered: 10%, 12%, 22%, 24%, 32%, 35%, 37%.  While individual provisions in the new legislation technically expire by the end of 2025, many people “in the know” expect that a future Congress won’t actually let them lapse.
  • Doubled standard deduction: Lawmakers want fewer people to itemize their taxes and so they’ve doubled the standard deduction.  Single filers’ deduction has increased from $6,350 to $12,000 and joint filers’ from $12,700 to $24,000
  • Bye bye personal exemption: No longer can you claim $4,050 personal exemption for yourself, your spouse and each of your dependents to lower taxable income.
  • Bye bye alimony deduction: Alimony payments codified in divorce agreements for ex-spouses who earn less money are no longer deductible for the payer.  This provision will apply to couples who sign divorce or separation paperwork after December 31, 2018 so … hurry up and get divorced??? That feels like an off recommendation.
  • Homeowner loss deductions toughened: Losses sustained due to a fire, storm, shipwreck, or theft that aren’t covered by insurance were deductible if they exceeded 10% of your adjusted gross income.  Now through 2025, you can only claim that deduction if you’re affected by an “official national disaster” … hmmmm.  It makes you hope that if your house is destroyed by a fire, it’s by the California wildfires and not little Johnny playing with some matches.
  • Lower inflation adjustments: The new legislation uses chained CPI to measure inflation, a slower measure than previously used; over time, this will raise more money for the federal government, but deductions, credits and exemptions will be worth less.
  • Homeowners’ profits unchanged: Homeowners who sell their house for a gain will still be able to exclude up to $500,000 (or $250,000 for single filers) of capital gains.

Phew!  Quite a list.  We hope this is a helpful compilation of the new tax legislation for you and those dear to you.  We’ll keep you updated on any updates to these changes or related information as it all unfolds.