The United States Senate and House of Representatives convened last December 04, 2017, Monday, to discuss the visible differences between their separate tax bills. Hundreds of billions of dollars are at stake, and it will be a Herculean task to reconcile them.
Both versions of the legislation affect the real estate industry in positive and negative ways.
In fact, it is foreseen that the major beneficiaries of this bill are private businessmen, millionaires, and private equity managers. Regular homeowners who are not in real estate investment trusts are least likely to benefit.
How does this affect homeowners in New York?
In the Manhattan area alone, prices have already started dropping by less than 10% even before the revised country tax bill has been voted. Lesser sales are expected in days moving forward as mortgage interests are being slashed. The same is happening with the state and local taxes.
Real Estate Board of New York President, John Banks said that “The tax reform legislation under consideration contains elements that will promote economic growth and job creation,” however, “There are several issues, however, with which we remain deeply concerned.”
New York is considered to be one of the high-tax states with property owners paying higher taxes than other areas in the country. If the bill is implemented, the amount of estate tax that residents can deduct from their federal tax bills is limited to the maximum amount of $10,000. And instead of the maximum $1,000,000 mortgage interest deductions, it has been capped to half of the previous amount.
Future home sellers in the tri-state area may suffer as well. Prices will drop, even on high-end markets which means the total profit value will also take a plunge. But interested buyers of high-end properties can take advantage of this change.
However, the current ruling that allows buyers to deduct mortgage interest on the equity loan wouldn’t be applicable anymore. Homeowners have something to lose, one way or another.
The biggest impact of the reformed tax bill on the real estate industry
Only Limited Liability Companies that are not liable for corporate-level income taxes stand to earn from bill once it is passed. Since most developers from big states like New York depend on them, they too gain big from this.
Estimated exemption of their income from tax charge is about 22.4%. The chief economist of Savills Studley, Heidi Learner said that “This could certainly cause a lot of people to rethink how they structure their business” and choose to partner with LLCs instead for the benefit of the tax deduction.
Furthermore, in this new revision, properties depreciate earlier than the old legislation. From 39 years, it has been decreased to 25 years.
Founder of Ariel Property Advisors, Shimon Shkury, says that “The property owner has a non-cash deduction, and essentially shelters more income” which is very compelling to many.
Another beneficiary of the change in the country’s tax bill are homeowners with private jets since they are included in the tax capping. However, they still need to follow current tax laws for airlines and private jets.
For more information on the tax reform bill, I broke it down in detail here: How Will the New Tax Law Affect Real Estate?