New Jersey grapples with new tax law

Everyone knows New Jersey is a high-tax state — it has the priciest property taxes in the country. That’s why homeowners are gnashing their teeth over the federal Tax Cuts and Jobs Act of 2017, which puts a $10,000 limit on state and local tax (SALT) deductions as well as a $750,000 cap on mortgage interest deductions.

Homeowners, especially empty nesters, could pull up stakes in search of lower taxes, experts said, and home prices could fall as a result.“You might see a problem of people relocating from New Jersey,” said Stuart Saft, an attorney and head of real estate at Holland & Knight. Florida is a popular haven, but “if they move a few miles to the west, they can buy in Pennsylvania, where the taxes are much lower.”

Take producer Colby Gaines of reality TV show “Pawn Stars,” who is planning a move to his native Texas in August. There, he and his wife could save $500,000 a year on taxes, he said. In May, the couple paid just over $4 million for a house in Austin and listed their custom-built home in Westfield, New Jersey, for $6.95 million. “I’m pro-Jersey, but it has almost 9 percent state income tax,” he said. “The exodus is apparent to everyone.”

Others said the cap on mortgage interest may dissuade people from buying at all, which could result in the rental market seeing increased demand.

But not everyone is going to uproot themselves and their families to avoid the Internal Revenue Service. And some say the lower tax brackets and larger standard deductions, in addition to other changes, may end up putting more money in their pockets.

The Real Deal talked to four experts about what the new law will mean for New Jersey taxpayers.

Stuart Saft
Partner and head of the real estate department at Holland & Knight

Six months after the law was passed, what’s the overall impact on the real estate industry in New Jersey? I think it is really too early to tell, because most people are not going to feel the effect of the tax law changes until they file their 2018 tax returns. Certainly the economy seems robust, and it is just a question of the longer-term impact on the overall economy and the various regions of the country. The cap on the state and local tax deductions certainly will have an impact, but the odd thing is that it is not going to affect the people at the high end because they are already subject to the alternative minimum tax and the reduction of the availability of deductions. It is going to be the middle-income people that itemize their deductions who are going to be hit the hardest by this change, possibly making their homes less affordable.

Is there any impact NJ residents are seeing now? I think the only impact that we are seeing at the present time is that business is more optimistic because of the reduction in various regulations. This has led to an increase in spending by corporations, so more people are being hired. But it’s only been six months, and these things have a way of having unintended consequences
years later.

Who is seeing the biggest impact under SALT — homebuyers or sellers, or both? The New Jersey economy will struggle with an exodus of middle- and upper-middle-income people to lower-taxed states because the new governor is looking to increase taxes, which will have an adverse impact on the valuation of homes that are being sold. It is going to hurt the sellers and help the buyers.

What are your clients asking you about? The biggest thing I have been talking about for the last couple of weeks has to do with “opportunity zones.” That is a hidden portion of the new tax law which creates a deferral of capital gains income if the money is invested in the development of property and businesses in disadvantaged areas. It was a bipartisan addition to the tax bill which most people failed to notice. A number of the deals I have been talking about over the last couple of weeks are these opportunity zone developments.

The governor signed a law in May allowing homeowners to bypass the tax law and declare property taxes as charitable donations. Will this stand up to federal legal challenges? I do not think there is a chance that it is going to hold up.

Robert Gilman
CPA, accounting and audit partner at Anchin, Block & Anchin

How do you think the new tax laws will impact the real estate industry in New Jersey? We don’t know yet, but we do believe there’s going to be quite a number of people who are going to be leaving these high-tax states.

Houses priced in the $1 million-to-$3 million range are probably going to see the biggest effect. If I’m somebody looking for a house in New Jersey in that price range, I may reconsider, knowing that I’m going to lose part of my interest deduction. I’m already losing state and local taxes, and I’m going to lose real estate taxes.

Certainly as someone who needs a mortgage of more than $750,000, they may now opt to move out of that state.

The other side is the rental real estate market — that may have a flip side, as people may not want to own.

If people say, “I would rather rent than buy,” rental prices may increase, and if you own rental properties, those values may increase.

Are homeowners subject to the same tax deduction caps if they rent out their property? The answer is no. But as long as you’re under the exemption for interests, all your mortgage interests — whether you take a $5 million mortgage, a $6 million mortgage, it’s not limited to $750,000  — you would be able to get deductions.

In addition, on rental properties, 100 percent of your real taxes are deductible. A lot of people think, “I’m going to rent out my house for a week, and I’m going to take that full deduction.” That is not correct. If you rent out your house for half the year, you would be able to deduct half the real estate taxes; you can’t take all of it.

Do you see or expect more people looking to get their homes reappraised? I think people are definitely doing that. People who are now limited on their deductions — there’s an uptick in the people who are going to get these reassessments done.

Are luxury or high-end homebuyers thinking about the tax issue when shopping for homes? Homebuyers are losing $250,000 in interest deductions. But for true luxury homes, whatever that number may be, that’s not going to affect buyers. However, for a high-net-worth person who makes money selling stocks — or even if they’re retired — all the money they make is just investment income. If they have a significant amount of New Jersey income taxes, they can only deduct $10,000 of those state taxes. They may say there’s no reason to live in New Jersey because of the loss of that deduction.

Are there any loopholes homeowners can use to lessen the impact of the tax law? I’m not going to call it a loophole. Pass-through entities could be eligible for a 20 percent deduction on their income. A person would only pay tax on 80 percent of pass-through income, which would mean your tax rate for federal purposes would only be 29 percent as opposed to currently 39 percent. So you have a 10 percent savings. But there are limitations with that. We’re waiting for final regulations.

Tracy Freeman
Broker/sales associate, Coldwell Banker Residential Brokerage in Maplewood

Some reports say New Jersey residents are looking to relocate to Florida or other states with a lower tax burden. Is there any truth to this? There is always a population of homeowners who leave New Jersey and the Northeast and head south to get some relief from the higher real estate taxes we have here, as well as the overall higher cost of living. However, they typically don’t move until their children are out of school. We have a wonderful public school system here in New Jersey, and many parents are willing to pay the higher costs and taxes for that.

Just how worried are people? Smart homeowners are already talking to their tax professionals about the changes to the tax bill. Most think they will break even or perhaps even do better once all of the changes are taken into consideration. They are waiting to see how next year’s taxes go.

How is the new tax law affecting sales? Sales are as strong, if not stronger, than ever. Inventory is very low. Especially along the train lines. Some say an acceptable “luxury tax” is also keeping homeowners in New Jersey. The luxury refers to the ability to be able to hike in the South Mountain Reservation in the morning and head into NYC in the afternoon, be it for work or pleasure, which is a true benefit to living here. Plus, we are only 45 minutes away from being down the Shore with our toes in the sand.

Are luxury or high-end homebuyers thinking about the tax issue when shopping for homes? No. New Jersey has historically had higher taxes than most of the country. For better or worse, homeowners here accept taxes as a part of the cost of living here.

Are you seeing a rise in appeals as far as tax assessments go? There are typically tax appeals during a town-wide reevaluation. Not now. The tax reform bill has not affected home values, so a tax appeal would be pointless. If we saw values falling significantly, then an increase in tax appeals would make sense. But we are seeing the opposite. Home values, specifically along the train lines, are increasing or, depending on price point, at the very least maintaining.

Douglas Standriff
Attorney in Maywood, NJ

Are you seeing many homeowners looking to get their homes reappraised? I believe there will be a significant number of appeals in 2019. Any residential property valued above $1 million should be reviewed, and anything above $3 million is absolutely a potential appeal. The effect on commercial property may be slightly less.

What are you most focused on when it comes to the impact of tax reform on real estate? My main concern is: What is the real or actual effect of the entire Trump tax law? For example, will the changes to the alternative minimum tax (AMT) offset the reduction in the SALT deductions?

In the past, many people who claimed SALT deductions were also affected by the AMT. Under the Trump plan, in simple terms, the AMT will not affect nearly as many people because the income levels which trigger the AMT have been raised significantly.

Are people worried about the law? Yes. But I believe the changes to the AMT will benefit many people in Northern New Jersey. The AMT changes, plus lower real tax rates, may offset the phase-out of the SALT deductions enough that many people do not see a tax increase. In fact, they may see a very slight federal tax decrease for 2018 as a result of the new law.

—E.B. Solomont contributed reporting to this story.