How will Federal tax law changes impact our New York real estate markets? Since several major issues remain to be worked out, and the bill has just begun debate in Congress, it’s far too soon to tell. With so many different constituencies lobbying pro or con various provisions, we know very little about what the final bill will look like. That said, we can certainly prognosticate based on some of the proposed bill’s more significant changes:
- The deductibility of mortgage interest. This part of the bill could well remain intact, because such a small percentage of U.S. homeowners have mortgages (or houses) worth in excess of $500,000, which would replace $1,100,000 as the new maximum deductible mortgage amount. Of course, the impact on New York City would be substantial, especially for homes priced at $2 million and under. Fortunately, at least for now, the true value of the lost deduction reflects the low interest rate climate. The value of a lost interest rate deduction on $600,000, calculated at 4%, is $24,000; for someone paying at a 40% tax rate, the cost would be $9600 per annum. Inconvenient, certainly, but not a market killer.
- The deductibility of state and local taxes. While the end of the Alternative Minimum Tax should have some mitigating effect on this provision, the heaviest burden will fall on high tax states like New York, and high tax municipalities like New York City. Since there is a substantial groundswell of opposition to this from Representatives and Senators on both sides of the aisle who hail from high tax states, it remains to be seen if it will make the final cut. I originally anticipated that for many of our customers and clients these losses would be offset by the proposed reduction of the top Federal income tax rate, but that reduction has apparently gone by the wayside for earners of $1 million or more. So this provision could result in higher taxes for our clientele, which is never a good thing for our business.
- Business tax rates. Other than the clear plan to reduce corporate tax rates to 20%, which will be a boon to both shareholders and large business owners, this part of the bill remains a work in progress. The bill proposes a reduction in the tax rates paid on the profits of pass-through entities like subchapter S corporations, partnerships, and sole proprietorships. Pushback began almost immediately from those concerned that this would create a loophole for people in the highest brackets to create pass-through entities as a way of lowering at least part of their tax burden from 39.6% to 25%. Time will tell. Since so many real estate clients are either corporate officers or business proprietors, these provisions would be highly beneficial to them and thus to the real estate marketplace.
Overall, everyone needs to assume a wait and see attitude. The first shots have been fired, but there are long battles ahead in both the House and the Senate before we truly understand the final implications of this tax bill for our client base. For now, we can sit back with interest and watch the show!