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Real Estate Perspective on The New Tax Proposal

NYC Real Estate Perspective on the CURRENT Tax Proposal (12/8/17)

The House and the Senate are working on their tax overhaul and they are reconciling several versions. It may happen by Christmas. If the bill passes the way it is structured now out of the Senate, here’s where we stand:

Currently we can write off all real estate taxes on our personal returns. In the new plan only $10,000 would be tax deductible.

The proposed plan eliminates deductions on State and Local taxes. Manhattan residents pay high rates for these, so taking away the deduction could mean an adjustment to a much higher federal tax.

Mortgages up to $1.1 million are tax deductible now, that would drop to $500,000 and would only be deductible on primary residences. Mortgages already in place as of certain date would be grandfathered in. They have discussed no deduction for home equity interest.

There is also discussion about the actual tax rates coming down, still in the works, no figures yet.

Right now commercial real estate is depreciated over 39 years. That would drop to 25 years in the new proposal. This would give a huge advantage to commercial landlords.

The reason Manhattan, Westchester and California are primarily affected is because of the value of property, high mortgages, and high income and real estate taxes.

My two cents worth:

Foreign investors would not be affected in any shape or form. They don’t pay state or local taxes, they don’t get write offs on federal taxes (unless an investor does not execute a 1031 Tax Exchange). I do not think this will affect the New York City market that is already in the toilet. The market depends on many other factors. You have to be a strong buyer to begin with. New Yorkers are resilient, in order to live here and survive here. Moreover, investors still get full tax deduction on the real estate taxes they pay. A young Wall Street guy making $400,000 a year would still purchase because staying in the rental market has zero benefits. Whereas homeowners can still get a tax deduction, even if what you pay may be higher in the coming years. The big Wall Street guy, lawyers, might end up paying more in taxes, but it won’t matter as much when you’re talking about very high income brackets above $3-4 million. Besides, the overall tax rate might go down, which could compensate for this. And, if the wife still wants her new apartment – that will always be true.

Sources: NY Times, The Real Deal