Like everyone, brokers are curious about what impact the new tax law will have in general, and specifically, on the NYC real estate market. This week, we were invited to hear from Alan Perlowitz and Andrew Luftig of the real estate law firm Chaves & Perlowitz, LLP, on the subject. The handout from their presentation is below my signature, for your interest.
The preliminary takeaways I took from the discussion regarding NYC housing are:
1) The loss of most if not all of the real estate tax exemption will dis-incentivize moving to the suburbs. Many of those who move out when they have a first or second child do so to avoid high tuitions for private schools in the city, opting for the generally good public schools in the suburbs. Those suburban schools are paid for by MUCH higher real estate taxes than in the city. But until now, those high real estate taxes were deductible. No longer.
2) Buying loses some of the factors equalizing monthly costs with those of renting, since the deductions for real estate tax and a portion of mortgage interest have either gone away or been made impractical. Actual living costs should not rise, because these changes are balanced by the higher personal deduction and lower tax rates, but renting will look cheaper on a monthly basis.
however, by my calculations, the costs of these changes should amount to about 0.5%-1% of purchase price per year; but since NYC real estate historically appreciates by about a minimum of 4% a year over time, conservatively, there is still very strong incentive to own.
on a monthly basis, ownership costs remain relatively stable with a 30 year fixed rate mortgage (real estate tax increases will be even more constrained than they have been), while renters are still subject to severe annual market-based increases.
3) For owners of multi-family homes, real estate taxes and mortgage interest on the rental portions of their properties are still fully deductible as business expenses, and thus do not impact the maximum deductible amounts for mortgage interest and real estate tax on the part that is your personal residence.
In short, ownership in Planet Capitol is still a much better deal for those who know they'll be here for at least a few years. And the fact that the market may be just a bit choppy for a few months while people and their accountants sort all this out should mean a relative opportunity this Spring compared to buying later in the year, or next.
Please contact me if I can provide any assistance or answer any questions about NYC real estate. Please also bear in mind that you should consult your accountant on any questions relating to tax matters.
WHAT YOU NEED TO KNOW ABOUT THE NEW TAX BILL
THE NEW TAX LAW CAN SWAY DECISIONS ABOUT WHETHER TO BUY A HOME, OR WHERE TO SEND KIDS TO SCHOOL. IT COULD EVEN AFFECT WHEN UNHAPPY COUPLES DECIDE TO GET A DIVORCE.
1. This is the first significant reform of the U.S. tax code since 1986.
Reagan signed major legislation for corporations and individuals in 1986.
2. The state and local tax deduction now has a cap.
The state and local tax deduction, or SALT (State and Local (Income) Taxes), remains in place for those who itemize their taxes — but now there’s a $10,000 cap. Previously, filers could deduct an unlimited amount for state and local property taxes, plus income or sales taxes. Real estate taxes are now grouped with SALT and capped at $10,000. What this means in NY is that individuals will lose their entire real estate tax deduction.
3. Changes have been made to both individual and corporate tax rates.
Individual provisions in the new legislation technically expire by the end of 2025, though some people expect that a future Congress won’t actually let them lapse. Most of the corporate provisions are permanent.
4. The mortgage interest deduction has been lowered.
A. Current homeowners are in the clear. But from now on, anyone buying a new home will only be able to deduct the first $750,000 of their mortgage debt. That’s down from $1 million. For current homeowners: Deduction on 1,000,000 of principal still applies as long as there no cash out refinance.
B. Refinancing. Homeowners may refinance mortgage debts existing on 12/14/17 up to $1 million and still deduct the interest, so long as the new loan does not exceed the amount of the mortgage being refinanced.
C. Second Homes. Interest remains deductible on second homes, but subject to the $1 million / $750,000 limits.
5. Home sellers who turn a profit keep their tax break.
Homeowners who sell their house for a gain will still be able to exclude up to $500,000 (or $250,000 for single filers) from capital gains, so long as they’re selling their primary home and have lived there for two of the past five years.
6. The deduction for moving expenses is gone.
There may be some exceptions for members of the military. But most people will no longer be able to deduct the cost of their U-Haul when they move for work.
7. The corporate tax rate is coming down.
The corporate tax rate has been cut from 35% to 21% starting next year. The alternative minimum tax for corporations has been thrown out altogether. Earnings are expected to go up as a result.
8. Almost everyone is now exempt from the estate tax.
Before tax reform, few estates were subject to the estate tax, which applies to the transfer of property after someone dies. Now, even fewer people have to deal with it. The amount of money exempt from the tax — previously set at $5.49 million for individuals, and at $10.98 million for married couples — has been doubled.
9. Pass-through entities will also get a break.
The tax burden by owners, partners and shareholders of S-corporations, LLCs and partnerships — who pay their share of the business’ taxes through their individual tax returns — has been lowered via a 20% deduction. The legislation includes a rule to ensure owners don’t game the system (compensation requirements), but tax experts remain concerned about abuse of this provision.
10. None of this will affect your 2017 taxes.
Americans won’t need to worry about these changes when they start filing their 2017 tax returns in about a month. The new laws will first be applied to 2018 taxes.
11. Fewer people will have to deal with the alternative minimum tax.
The alternative minimum tax, a parallel tax system that ensures people who receive a lot of tax breaks still pay some federal income taxes, remains in place for individuals. But fewer people will have to worry about calculating their tax liability under the AMT moving forward. The exemption has been raised to $70,300 for singles, and to $109,400 for married couples.
12. There are still seven tax brackets for individuals, but the rates have changed.
Americans will continue to be placed in one of seven tax brackets based on their income. But the rates for some of these brackets have been lowered. The new rates are: 10%, 12%, 22%, 24%, 32%, 35% and 37%.
13. The standard deduction has essentially been doubled.
Lawmakers want fewer people to itemize their taxes. To achieve this, they’ve nearly doubled the standard deduction. For single filers, the standard deduction has increased from $6,350 to $12,000; for married couples filing jointly, it’s increased from $12,700 to $24,000.
14. The personal exemption is gone.
Previously, you could claim a $4,050 personal exemption for yourself, your spouse and each of your dependents, which lowered your taxable income. No longer.
15. But say goodbye to the tax deduction for alimony payments.
Alimony payments, which are codified in divorce agreements and go to the ex-spouse who earns less money, are no longer deductible for the person who writes the checks. This provision will apply to couples who sign divorce or separation paperwork after December 31, 2018.
16. The disaster deduction.
Losses sustained due to a fire, storm, shipwreck or theft that aren’t covered by insurance used to be deductible, assuming they exceeded 10% of adjusted gross income. But now through 2025, people can only claim that deduction if they’ve been affected by an official national disaster. That would make someone whose house was destroyed by a California wildfire potentially eligible for some relief, while disqualifying the victim of a random house fire.
17. Adjustments for inflation will be slower.
The new legislation uses “chained CPI” to measure inflation. It’s a slower measure than what was used before. Over time, that will raise more money for the federal government, but deductions, credits and exemptions will be worth less.
Please note the above information was compiled by Chaves & Perlowitz LLP through numerous websites and articles. Chaves & Perlowitz makes no representations or takes any responsibility for the accuracy of any information contained herein.
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