With dreaded Tax Day literally around the corner, what better time than now to consider some of the new tax changes which may affect our tax returns when we file in 2019. How will the new limitations on mortgage interest and state and local taxes (SALT) deductions impact the NYC market? (Disclaimer: I'm not a tax professional or a financial advisor, so always consult with appropriate professionals when thinking about your own situation)
Capping the mortgage interest deduction to mortgage debt of $750,000 (reduced from $1 million for married couples filing jointly) means new homeowners with loans over $750,000 will be able to deduct less of their mortgage interest. However, this lost deduction amounts to at-most $10,000 annually (the difference between the deductible mortgage interest on loans of $1 million or more versus $750,000, at a 4% interest rate).
The cap on SALT means that most New York homeowners, who pay high state and local income taxes, will have little (if any) allowable SALT deduction left over for property taxes. Based on listings from the last 6 months, the average annual taxes on properties priced around $1 million are about $8,250 in Manhattan and $2,500 in Brooklyn. For properties priced around $2 million, the respective averages are about $15,000 and $6,000. To put these figures in context, in neighboring Westchester the median home price is $475,000, but average annual property taxes are over $16,000.
These reduced deductions have a relatively minor affect on potential homebuyers and much of it may be offset by decreases in marginal tax rates and other potential savings under the new plan. While reasonable minds may differ on what effect this will have on home prices in NYC, I do not expect any appreciable downturn or negative impacts. As distinguished from other markets, in many parts of NYC supply is finite and demand continues to grow, and the real estate market has proven to be quite resilient even in the face of dire economic conditions (e.g. the market bouncing back after the 2008 Recession). Of course, it is always important to consider the specific attributes of a property and what might make the property especially resilient to economic conditions (such as monthly costs, location, building age, etc). Even in NYC some investments may fare better than others....