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Tax Bill & Manhattan

Posted by William Hobbs on February 7, 2018
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Basics of the Tax Bill

  • Corporate Tax rate has dropped from 35% to 21%.
  • Doubles the Estate Tax exemption from $5.5M to $11M.
  • Individual tax rates have dropped from 39.6% to 37% and will expire in 2025.
  • Allows for up to $10,000 of deductions in state and local sales, income, and real estate taxes (SALT).
  • Doubles the standard deduction to $12,000 and $24,000 for married couples.
  • Alimony will no longer be deductible in 2019.
  •  20% income deduction from pass-through businesses.
  • Taxpayers in high tax states are likely to pay more taxes (NY, NJ, CT, CA).

Manhattan Real Estate & the Tax Bill

  • High pct of buyers/owners in Manhattan pay AMT and had no benefit from former SALT tax regime.
  • Mortgage Interest deduction reduced to loans of $750,000 or less – existing mortgages are grandfathered in at the $1M.
  • Mortgage interest remains deductible for primary and second homes, up to $750,000.
  • Second homes will retain the ability to take mortgage interest deductions.
  • Interest on Home Equity Loans is no longer tax deductible.
  • Depreciation on investment property reduced from 39 years to 25 years. 35% shorter.
  • Foreigners are not impacted by the bill and represent ~8% of buyers.
  • The capital gain exemption for a primary residence remains untouched at $250,000 for individuals and $500,000 for joint filers.
  • The tax bill’s most obvious impact will be a new spiral of wealth upwards, and wealth always concentrates into Manhattan real estate.

Manhattan Outlook 2018

  • Short-term impact of rising interest rates could lead to buyers looking to lock in low mortgage rates.
  • Long-term impact of rising interest rates will reduce affordability and drag on price.
  • Supply of Resale and Existing property likely breach 4,000 for the first time since 2012.
  • Supply of New and Recent Development property near all-time high.
  • Supply is near the loosest point in nearly five years.
  • +40% of all sales in the last 2 Quarters of 2017 sold at or over the asking, suggesting the strength of demand of the market when the price is right.

Who will benefit from the new tax bill?

  • The biggest winners are individuals who own investment properties in as LLC/Corp.
  • LLC/Corp. owners will take all interest and real estate tax payments as expenses and benefit from a 35% shorter depreciation schedule.
  • Real estate owned in LLC’s will have pass-through benefits onto your tax return.

Co-operatives

  • Co-operatives are organized as Corporations, and the expectation is that they will be able to deduct real estate taxes and interest on common mortgage as expenses like any other corporation. Shareholders will benefit at the corporate level.

Condominiums & Single Family Homes

  • Where possible, own as an LLC and deduct real estate taxes and mortgage interest at the business level as expenses.  Best employed for a second home or investment property for example.
  • Leasing back a condo or single family home as a primary residence of the LLC owner will be tested before the industry knows the IRS position on it. It likely will not pass.

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