There are signs home buyers in metropolitan New York are pausing to consider the effects of proposed federal tax law changes, setting the stage for a possible chill in the market, brokers say.
The changes, in versions of bills in both the House and the Senate, likely would increase the cost of home ownership and reduce after-tax discretionary income for many mostly affluent home buyers in New York and other states with high state and local income and property taxes, brokers and analysts say.
Those taxes now can be deducted from income on federal tax returns. The proposals would reduce or eliminate that benefit, though some of the benefit already is offset by another federal tax provision known as the alternative minimum tax.
The proposed tax changes are threatening the already vulnerable high-end housing market in New York City and the surrounding suburbs, brokers say, as some prospective buyers put off decisions.
"People are worried," said Donna Olshan, president of Olshan Realty Inc. in New York, who follows trends in the luxury market. "They want to know how much less money is going into their pockets every year. The tax changes proposed in the House and the Senate mean a pay cut for New Yorkers."
Dawn Knief, a broker in the Scarsdale, N.Y., office of Julia B. Fee Sotheby's International Realty, said buyers aren't panicking, but they were closely watching what was happening in Washington.
Many communities in Westchester are known for their quality public schools and high property taxes that pay for them. "People are still digesting all of this," said Ms. Knief. "If this comes to pass, there might have to be some price adjustments."
Brokers said the tax issue regularly comes up in conversations with buyers, particularly more sophisticated ones who work in finance, and some people have put plans on hold.
In New York City, budget analysts said they might have to reduce revenue forecasts from the city's transfer taxes on residential property sales because of expectations of fewer sales and lower prices. In Florida, where there is no income tax, brokers say they expect to see a new wave of buyers from New York and California looking to move there to reduce taxes.
"If legislation like this passes, I think people will be running for Florida, that is a perfect escape route," said Pamela Liebman, president of New York-based Corcoran Group, which also operates in South Florida. "We have seen it all before, and it will escalate."
The proposed tax changes are complex and will affect home buyers in different ways. They were designed to reduce taxes for many middle-income families, by lowering rates and doubling the standard deduction that reduces taxable income.
But both the Senate and the House proposal reduce or eliminate deductions for state and local taxes that are important factors in high-tax states. The House version would preserve a deduction on up to $10,000 in property taxes.
Deductions of interest paid on loans totaling up to $1 million would be preserved in the Senate bill but would be capped at $500,000 in the House bill for new buyers.
The alternative minimum tax would be eliminated, blunting a portion of the impact of other tax changes. According to new estimates from New York City's Independent Budget Office, deductions by city residents for state and local taxes reduced their federal tax bills by $11.1 billion in 2015, but 24% of that was offset by $2.7 billion collected through the AMT.
The AMT totaled 30% of the savings from state and local tax deductions for taxpayers earning $200,000 or more, and 7% for earners making between $100,000 and $200,000, the budget office said.
Frederick Peters, the chief executive officer of Warburg Realty, said some proposed tax changes for business owners and partners could benefit the after-tax earnings of some New York buyers in the luxury market.
But most worrying to industry professionals were proposed changes that raise the direct cost of home ownership and likely reduce the value of a home. For example, ending the deduction on every $10,000 of local property taxes of a house would cost a homeowner in the 33% federal tax bracket $3,300 the first year. The budget of that added tax liability year after year, plus future property tax increases, could limit how much buyers are willing to pay for properties today, brokers said.
Likewise, the loss of the deductibility of $100,000 in mortgage interest would increase the after-tax interest costs on a jumbo loan by more than $1,200 a year.
Hall Willkie, president of brokerage Brown Harris Stevens, said the potential impact of tax changes is adding to uncertainty that has already led buyers to delay decisions and made them price sensitive.
"It is an uncertain time in the world," he said. "This is going to create another little pause until people get their hands around it."
Soon after the House tax plan was announced, Jeff Miller, a Miami broker, said he fielded several phone calls from New Yorkers who had looked at Miami Beach property in the past and were now getting serious.
One couple, who looked for homes in the area last year, is coming down to see a house on an island off Miami Beach listed for $22.5 million over the summer, Mr. Mille said.
"People I have been working with were on the fence," he said. "Now they want to move. The new tax bill was the nudge they needed to push them over."
Write to Josh Barbanel at email@example.com
(END) Dow Jones Newswires
November 15, 2017 08:14 ET (13:14 GMT)