Tax Time, Part 2

Early in 1981, I began showing apartments to a well-heeled young couple. He was an investment banker clearly marked for success, and he was sure that the market was overvalued and would swing his way. When they finally bought, in 1988, the market was approximately 8X where it had been during that first year when he felt so confident that bad times for New York real estate were right around the corner.

Over my years as an agent, I have learned that what I don’t know matters as much as what I do know. I have been reminded of this during the past few weeks as the tax debate has roiled Congress. Now, as some version of the tax bill seems ordained to pass, I wonder whether the new bill’s impact on our marketplace will be determined by its actual impact or by the growing circle of pundits already opining about the ways it will diminish our business.

It’s a funny thing about the news. It’s no longer really so much about news. Talking heads dominate the airwaves, and they dispense opinion as if it were fact. I have therefore not been surprised to read a number of articles quoting this or that “expert” on the dire consequences of the tax bill on our local real estate market. I am by no means a cockeyed optimist, but I’m not so sure the sky is falling. Here’s why:

• Tax changes which look to spell disaster for real estate rarely do. I am reminded most specifically of the loss of “rollover” during the 1990s. Before that time, any capital gain from a primary residence could be “rolled over” into the next residence, meaning that the tax bill wouldn’t come due until death, even if an owner moved a few times over the course of her adult life. After the change, other than a $250,000 primary residence exemption for single people and a similar $500,000 exemption for married couples (both large enough to guarantee that there would be no tax consequences for the vast majority of Americans), capital gains taxes came due every time an owner sold a residence. While the change did have a negative effect on supply, as owners of large, highly appreciated properties more often decided to hold onto them rather than scaling down, the market, after a pause of a few months, continued to rise for another decade before the recession hit.
• Most New York residences are bought by New York residents. It could well be that the loss of deductibility for state and local income taxes will discourage some prospective purchasers from moving to New York. This may indeed diminish our buyer pool. That said, most of our buyers already live here, or are moving here for job-related reasons. While the loss of deductibility on state and local taxes will certainly have negative impact on the plans of some out-of-staters to move here, that fact alone won’t impact our local market so much.
• The offsets may be greater than the losses. For the buyers of luxury property, the tax change both giveth and taketh away. And the giving hand may well be piled high with more cash! The reduction of the corporate tax rate by anywhere from 10% to 15%, and the favorable changes in the treatment of sub-chapter S corporations and other pass-through entities, will probably make the tax reform net positive for C-suite executives and many small business owners and sole proprietorships. In fact, between these changes, the strong stock market, and the hefty bonuses anticipated after an excellent year for many on Wall Street, it actually seems to me that over the next year to eighteen months there could be more upward than downward pressure on sales prices at the luxury end of the market.

As is so often the case with changes in tax policy, those toward the lower end of the revenue curve will probably feel it the most. First time buyers, many of whom are employees with little or no ownership position at their places of employment, benefit little from this tax bill while probably seeing their individual taxes rise through the loss of important deductions. So there could be negative price pressure at the lower end of the market; today, however, with demand still greater than supply I think it’s unlikely that a drop in values for properties under $1,500,000 will be deep or very long lasting.

Over my 37 years as a real estate agent I have lived through a lot of markets. Almost all the major changes have been driven by economic factors, not policy changes. While I am completely skeptical about the ability of tax cuts to create growth in the economy (an economy which appears to be chugging along just fine in any event) I also don’t see this plan as likely to cause major disruption to the values of New York City properties. I don’t have a crystal ball, but historically I am a pretty good prognosticator. That said, time will tell.