By John E. Baer, SRES, SRS
The Tax Cuts and Jobs Act (TCJC) passed at the end of last year primarily benefitted the wealthy and large corporations at the expense of certain homeowners in affluent parts of the United States such as Westchester, low income Americans, and a good number of middle income Americans. According to Moody’s Analytics, homeowners in Westchester County will be the biggest losers in New York State. In fact, only two other counties in the entire United States will be more adversely affected than Westchester by this new legislation.
So, how may the tax legislation affect you? The final bill reduces the limit on deductible mortgage debt to $750,000 for new loans taken out after 12/14/17. Current loans of up to $1 million acquisition indebtedness are grandfathered and are not subject to the new $750,000 cap. Neither limit is indexed for inflation. Homeowners may refinance mortgage debts relating to mortgage indebtedness 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.
The final bill repeals the deduction for interest paid on home equity debt through 12/31/25. Interest remains deductible on second homes, but subject to the $1 million / $750,000 limits.
According to the IRS, taxpayers in Westchester in 2017 took the fifth highest average deduction for state and local taxes on their federal tax returns of all counties in the United States - $34,300. The new tax law allows tax filers to deduct a maximum of $10,000 in property taxes, state and local income taxes, and sales taxes. This $10,000 limit applies for both single and married filers and is not indexed for inflation. And because close to half of Westchester taxpayers itemize their taxes, according to the New York State Comptroller’s office, they will be paying considerably higher taxes starting this year.
This tax policy remains unchanged from the previous law, which stated that owners must live in their home two out of the past five years in order to qualify for the exclusion.
Moody’s predicts that the tax legislation will nationally shave approximately 3% off home prices by the summer of 2019. In Westchester, Moody’s believes the average house price decline could be closer to 10.4% in 2019. In the next couple of months, however, Moody’s believes prices will flatten out rather than to immediately begin to fall. Even within metropolitan areas, including within Westchester County, the impact will be uneven according to Moody’s chief economist Mark Zandi.
The National Association of Realtors believes the impact on New York State homeowners will be far more severe. The NAR forecasts home prices to fall from 10% to 15% for New Yorkers. A decline in value, as projected, could mean a loss in home value of $22,280 to $33,450 for the typical New York homeowner.
At the end of last year Hudson Gateway Association of Realtor’s publication Real Estate in Depth wrote “While the Hudson Valley did see price increases across the board in the four-county region, ordinarily, this environment should bode well for buyers and sellers in 2018. The only immediate cloud on the horizon appears to be the low inventory levels being experienced in the entire market area. At year-end, inventory for Westchester was down 12.1%”.
Another unknown factor is tax reform. At this point in time no one can really assess the impact of the recently passed federal tax laws, which may have a significant impact on real estate in states where homeowners regularly pay property taxes in excess of the $10,000 total deduction allowed for both property and state and local income taxes.
However, given the overall strength of the market during 2017, there is certainly reason for optimism that the momentum will carry over into 2018.
Westchester Realtors have offered mixed opinions on what impacts the tax bill will have on the housing market which ranges from having little effects to a view that the tax changes could have significant impacts on some high cost and taxed locations, particularly in the southern sections of the Hudson Valley.
Mark Nadler, Director of Westchester Sales for Berkshire Hathaway HomeServices Westchester Properties, encourages people not to overreact to the tax changes. “Everyone needs to speak with their accountants or financial planners to see what the impact of the tax reform will be to them individually. Many people in our area were impacted by the AMT part of the tax code and, therefore, will have a less severe impact from these changes. In addition, since lower Westchester is historically a low supply market, a shift in the demand curve might not have as severe an effect as some people predict.”
John E. Baer, SRES, SRS is a NYS licensed real estate salesperson associated with Berkshire Hathaway HomeServices Westchester Properties of Scarsdale and Larchmont. He can be reached for questions at 914/600-6086 or at 914/844-2059. His website is www.WestchesterHomes.info.