The Tax Cuts and Jobs Act and The NYC Real Estate Market

The Tax Cuts and Jobs Act has been a controversial plan since it was first introduced several months ago. The final bill was recently signed into law and the new plan takes effect on January 1, 2018. Considered the biggest tax overhaul since the 1980s, the household and corporate savings generated through the tax cut are meant to stimulate the economy through higher wages, more corporate investment, and more take-home pay. Let’s take a look at ten ways that the economy (and the real estate market) will be impacted as a result of the new tax code.

Most income tax brackets will pay a lower rate in taxes: Almost all Americans will see a cut in their income tax rate through 2025 (when individual cuts are set to expire or be renewed). The highest tax rate is currently 39.6% for singles earning $418K+ and married couples earning $470K+. The new bill reduces the tax rate to 37% and raises the threshold to $500K for singles and $600K for couples. Considering that 1 in every 25 New Yorkers is a millionaire, NYC has the highest concentration of billionaires worldwide, and New York City is the number one location where the wealthy invest in real estate, we can expect to see some of these tax savings invested in the NYC real estate market.

On the other hand, the SALT deductions have been nearly eliminated: The current deduction for SALT (State and Local Taxes) is unlimited. Under the new tax code, there is a $10K cap per year for individuals and families. This impacts New York City most of all, where the average deduction among households making $200K or more is $84,964. Although Governor Cuomo signed an executive order allowing New Yorkers to prepay their 2018 property taxes in order to soften the blow, a Moody’s analysis finds that this change could contribute to a 9.5% decrease in property values in the coming years.

The new mortgage interest deduction has been reduced from $1M to $750K: Interest on new mortgages for first or second homes will only be allowed on debt up to $750K, down from the current limit of $1M. This does not apply to mortgages currently held. Deductions for interest on home equity loans up to $100K will no longer be allowed. This, combined with the SALT change, may lead new buyers to forego the New York City metro area when considering where to buy homes, and instead may drive them to tax-friendlier cities such as Austin, Texas. Some analysts say the negative impact of this and the SALT change will be offset by the following:

The estate tax threshold has been doubled: Under current law, single heirs can receive up to $5.5M and married couples can receive up to $11M in property, stocks, or other assets tax-free. Above that, the federal government takes 40%. The tax-free threshold for the estate tax (also called the Death Tax) has been doubled to $11M for single filers and $22M for married filers.

The individual AMT threshold has been increased: The current Alternative Minimum Tax exemption for singles is $55,400 and for married couples is $86,200. It phases out at $123,100 and $164,100 respectively. The new thresholds are $70,300 and $109,400; and phasing out doesn’t hit until $500K for singles and $1M for joint filers. This means a large chunk of the population will no longer have to pay AMT. 

The standard deduction has been doubled: The new deduction cap is $12,000 for individuals, $18,000 for heads of households, and $24,000 for married couples filing jointly.

The child tax credit has doubled: Thanks largely to Marco Rubio, families making up to about $400K can now take a $2K tax credit per child rather than $1K per child.

The corporate AMT has been eliminated: Gone.

Pass-through companies get a 20% reduction through 2025: Companies classified as pass-through, such as LLCs, S Corporations, Partnerships, and Sole Proprietorships, can now deduct 20% of their income tax-free. Service-based companies can only do so if their income does not exceed $157,500 for singles and $315,000 for joint taxpayers. This element of the tax cut is particularly advantageous to commercial real estate companies, developers, and investors, since a high percentage of these businesses are structured as pass-through companies. This may lead to an increase in the number of developments hitting the five boroughs, if the business owners choose this manner of investing their savings.

The corporate income tax rate has been reduced from 35% to 21%: This is great news for businesses all around the city and the controversial expectation is that these tax savings will translate into higher wages, more jobs, and more business development such as purchasing of properties and leasing of commercial spaces for business operations. The new tax code also allows businesses to deduct interest expenses for construction, property development, and other real estate activities, offering a generous deal to real estate organizations not excluding The Trump Organization and Kushner Companies.

We started the year wondering what NYC real estate would look like under Trump and we’re closing it out with some solid answers. 2017 held a strong residential market and home values across the city continue to increase in most segments. I will keep you updated throughout 2018 about how the tax plan plays out citywide.

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