Are SALT Deductions to Blame?
By Dan Murphy
A friend in the real estate business in Westchester told me that a good barometer for how much high-end, luxury homeowners pay in property taxes can be based on the value of the home. For every $1 million in the value of a home, $20,000 in property taxes will be paid by the homeowner every year.
I then realized that for a $4 million to $5 million home in Westchester, the property taxes on that home are $80,000 to $100,000 per year, and with the passage of tax reform act in Washington, D.C., Westchester homeowners now have a $10,000 maximum that they can deduct in real estate taxes and in state income taxes.
It was only a matter of time before many believed the limits placed on state and local property taxes would impact real estate sales in Westchester. The number of luxury homes sold north of New York City continues to decline, as the consequences of tax reform, a soft NYC market and a generational shift in buyer preferences and attitudes impact the luxury markets, according to Houlihan Lawrence’s second quarter luxury market report, which was released recently.
In Westchester County, Q2-2019 marks the third consecutive quarter of luxury home sales ($2 million and higher) declines. From Oct. 1, 2018 through June 30, 2019, the number of homes sold dropped by 28 percent, compared to the previous time period.
Based on pending sales, there are hopeful signs that the third quarter could reverse the trend of declines. Luxury sales in the ultra-high end of the market (sales $5 million and higher) suffered the steepest losses in the first half, down by about half or more in Westchester, Greenwich, Darien and New Canaan. Supply is inching up in some markets and the number of years it will take to absorb these listings is increasing. Westchester County has seven years of $5 million-plus inventory; Greenwich has more than three years in the ultra-high end. A balanced market typically has six to 12 months of inventory.
“The bigger conundrum facing our luxury markets is quantifying the changing tastes and attitudes of the new generation of luxury buyers,” said Houlihan Lawrence Senior Vice President Anthony Cutugno.” Bigger is not always better and renovating or restoring a period home is the desire of scant few. The expectation about the future value of real estate influences demand for luxury homes. Though this shift is in its early stages, its impact is tangible.”
Economic forecasters have more questions than answers, contributing to a general sense of uncertainty. For example, tax reform made home ownership more costly and is a major contributor to the decline in luxury sales. But weakening demand is driving down values in the luxury market, giving opportunistic buyers more bang for their buck. Consumer spending is up the first half, fueled in part by a rising stock market, but many question how much longer the bull market can continue.
Economic expansion is a decade strong, but the waning impact of tax reform on corporations and trade war tensions are holding back business spending, pointing to softer growth ahead. A looming presidential election adds another layer to the uncertainty that exists.
“Luxury home sales have declined not only north of NYC, but in many luxury markets, including NYC, the Hamptons and Miami” said Cutugno. “We bang the drum with the same message in this seller-challenged market – listings that represent value and appeal to buyers’ aesthetic will capture their attention and have the greatest chance of selling.”
Congresswoman Nita Lowey recently joined with County Executive George Latimer, North Castle Supervisor Michael Schiliro and the Hudson Gateway Association of Realtors to submit written testimony to the U.S. House of Representatives Committee on Ways and Means on behalf of the New Yorkers who have been over-burdened by the Republican tax law that placed a cap on the state and local tax deduction.
“Simply put, the cap on SALT deductions is an insult to New York’s residents and businesses that send more revenue to the federal government than our state receives back in federal support,” said Lowey. “Specifically, the Tax Cuts and Jobs Act’s cap unfairly burdens Westchester and Rockland taxpayers, who in 2017 ranked numbers one and two for highest average property taxes in the country. Seventeen months after enactment, the TCJA is not paying for itself, as many Republicans promised, and it is not boosting the economy. Outside of these disturbing but not surprising developments, taxpayers in states like New York are struggling to manage serious ramifications from the $10,000 cap on the SALT deduction.”
Prior to enactment of the Republican tax law, New York taxpayers who itemized could deduct their state and local property and income taxes. The SALT deduction was a major source of tax fairness for high-taxed states like New York, where 35 percent of taxpayers deduct an average of more than $22,000 every year.
“In my congressional district, which includes all of Rockland and parts of central and northern Westchester, the rate is even higher, with 45 percent of taxpayers relying on the state and local tax deduction at an average of $26,000,” continued Lowey. “The Republican tax law, however, capped the SALT deduction at $10,000, effectively raising taxes on millions of middle-class Americans who depend on the deduction.”
“As municipal government and school district leaders work to meet community needs in a fiscally responsible way, we would appreciate the partnership of the federal government, not the imposition of double taxation,” said Latimer. “As the county executive for Westchester County, I want to express my strong opposition to the federal limits on SALT deductions, and my strong support for the repeal of this limitation. In Westchester County, more than 47 percent of residents itemize their federal tax deductions with an average of $34,300 in deductions – well above both the cap and the new standard deduction. However, federal law now caps the SALT deduction at $10,000. This results in double taxation on the same income, and effectively raises taxes on thousands of middle-class and working families in Westchester who depended on the deduction.”
“The SALT deduction caps have been felt in our community, and time will tell how that will impact future investment and renovations in single-family homes,” added North Castle Town Supervisor Michael Schiliro. “There has been continued downward pricing pressure on all segments of the existing housing market, as buyers know that the deductibility of real estate taxes is now extremely limited, if not eliminated.”
HGAR Government Affairs Director Philip Weiden said middle-income New Yorkers will bear the brunt of the cap on the state and local income tax deduction. “Capping SALT along with the scaling back of the mortgage interest deduction will have long-term effects on wealth creation in the U.S. and will hurt America’s biggest asset, which is their home,” he said. “This has also hurt New York’s state budget and created new fiscal shortfalls that the governor and the Legislature must deal with. This will affect all areas of our state, whether they are upstate or down state.”
Lowey has been a leader in the U.S. House for restoring the SALT deduction. In January, she re-introduced a bipartisan bill with Republican New York Congressman Peter King to eliminate the SALT cap once and for all.
