Tax reform hasn’t hurt the RE industry as some predicted
WASHINGTON – May 22, 2019 – A year ago, the new $10,000 cap on the federal deduction for state and local taxes prompted dire predictions for the real estate market, especially in expensive areas like New York and San Francisco.
In these and other high-tax places, local property taxes alone can cost more than $10,000 a year. Many finance experts warned that limiting what these residents could deduct from their local taxes would lower home values and hurt governments' property tax revenue along with it.
As it turns out, those predictions were wrong – at least on a large scale.
"The actual response in the real estate market has [been] kind of all over the place," says Rudy Salo, a public finance attorney at Nixon Peabody in Los Angeles. "In general, the effect has been less than all the doomsayers – and that includes myself – thought."
The national real estate market was already slowing down before federal tax reform, so it's difficult to isolate what activity is driven by the tax change. But the new limit on the state and local tax (SALT) deduction hasn't led to a total real estate meltdown in high-tax markets.
Silicon Valley, San Francisco and Oakland, Calif., for example, are still among the most competitive housing markets in the country. They've experienced double-digit growth in sale prices over the past year, according to data from the National Association of Realtors.
Still, the SALT change has driven some people to make moves and may be slowing some markets.
A couple in Old Tappan, N.J., moved to a nearby town last year to reduce their tax bill by $10,000. Fairfield County, Conn., which has some of the highest property taxes in the nation, has seen a surge in homes going on the market over the last six months. In Florida, where many northeasterners have second homes, there's been a rush to switch residency to the lower-tax state, says John R. Mousseau, director of fixed income for Cumberland Advisors in Sarasota.
"Almost anyone I talk to here who has a second home is looking to do that trade," he says.
The luxury real estate market in high-tax states may be taking the biggest hit from federal tax reform, which generally increased what the wealthy owe.
In Brooklyn and Queens, sales of homes priced at more than $1 million have slowed, according to Mansion Global, which is reporting double-digit drops in the New York City boroughs. Meanwhile, luxury home sales have taken off in low-tax states. According to Redfin, three cities in Florida and Reno, Nev., were the fastest-growing markets for luxury home sales at the end of 2018. West Palm Beach topped the list with a 35 percent jump in prices.
In the longer term, most finance experts and local officials agree that local governments in high-tax states will be adversely affected by the SALT cap. That's because the cap could make it harder for local governments to raise property taxes in the future if residents can't write off that tax hike.
Instead, says Nassau County, N.Y., Comptroller Jack Schnirman, residents will likely be looking for tax relief. But lowering property taxes is "something that basically doesn't happen," he says. "In a world where fixed costs like health care and pensions are going up faster than inflation, local governments are looking at ways to cut costs just to keep pace."
Schnirman fears that the SALT cap will make counties like Nassau, which have an aging population and a higher cost of living, even more unattractive to younger people. Without growth in the working population and in the tax base, the financial pressure on government would increase.
"Nassau County was America's first suburb," Schnirman says. "The deal used to be, you move out of New York City, you have good schools, you have a home, access to beaches, parks. We don't want people to now be convinced that Charlotte or Austin or Florida is a better deal."
© 2019 Governing, Liz Farmer. Distributed by Tribune Content Agency, LLC.
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