While homeowners in high-tax states like New York and New Jersey may be packing their bags to move to Florida and Texas, real estate professionals in California say they are not seeing an exodus spurred by changes to the federal tax code.
But the new rules could have a “chilling effect” on asking prices for homes in the state, and lead many residents to decide to rent instead of own their homes, one private wealth manager said.
For the moment, agents and real estate executives interviewed by The Real Deal say they aren’t seeing a substantial number of buyers making plans to sell their million-dollar homes and leave the state.
California’s tight housing market has fueled soaring prices in both Northern and Southern California.
“All high-end sales are up,” said Nick Segal, president for Southern California of Pacific Union International. “Our biggest problem in that market is inventory. If sellers aren’t willing to put their houses on the market then I guess they’re not looking to leave.”
The new federal tax changes bring added pain to California residents already frustrated by the state’s high cost of living and some of the highest state income taxes in the country. Those state taxes have caused many residents, especially ones on the lower-end of the earnings spectrum, to migrate in recent years to Nevada, Texas, Florida, and other states with lower taxes.
In January, home prices in Southern California posted the largest year-over-year rise in 44 months. The median price rose to $507,000, reflecting an 11.4 percent hike since the year prior.
“Sure, we have seen a lot of people over the years move from here to Las Vegas, from here to Arizona, from here to Texas, Utah and Wyoming,” said Beth Styne, chief operating officer at Coldwell Banker in Los Angeles. “That is about state taxes. But our state taxes have been exorbitant for a long time.”
Styne said over the past two years she has seen a handful of clients from Beverly Hills and Bel Air sell out and move to Florida. And entertainment friends from L.A., in particular musicians, have moved to Austin, Texas, only to find that higher property taxes in Texas eat up much of the income-tax savings.
While the flow is still a relative trickle, “it is going to lead to a tipping point,” she said.
The tax man’s plan
The Tax Cuts and Jobs Act President Trump signed in late December will affect Californians in three ways.
Property-tax deductions will be capped at $10,000. Homeowners can only deduct up to $750,000 in mortgage debt on a first or second home, a one-quarter reduction from the previous $1 million limitation (homes purchased before December 2017 will be grandfathered). And the new regulations will deduct interest on home equity loans of up to $100,000, unless the proceeds are used to substantially improve a home.
Of particular concern is the loss of part of the mortgage interest deduction, which had always been considered a subsidy for homeowners.
“The reduction in that benefit may have a chilling effect on asking price,” said Susan Rounds, the director of wealth management in Los Angeles for Deutsche Bank Trust Company Americas.
Homeowners with a mortgage of more than $750,000 may be reluctant to move and purchase a new home costing more than that because it could result in the loss of part of their mortgage interest deduction, Rounds said. They may decide that the tax benefits of owning are no longer attractive enough and decide “renting is a better way to go.”
Even wealthier homeowners will need to carefully weigh the higher cost burden.
“That person in California with a $20 million house, the property tax is about to be $265,000 a year,” said Stephen Shapiro, co-founder of Westside Estate Agency. Under the new regulations, the homeowner would only be able to write off $10,000 of their taxes, so that means they would have to pay $255,000 a year more “just in property tax.”
The new tax pressures on homeowners are already creating concern for developers, Shapiro said. “Many houses are going to come on the market in the next year, many more houses than there are buyers,” he said. “It will lead to developers taking less of a profit than they have been getting over the last years.”
Still, with a strong economy fueled by an expanding tech sector and burgeoning entertainment industry paying higher salaries than in most other states, California continues to be a magnet for high-skilled millennials. While wealthy individuals that don’t need to work can decide to live anywhere, most high-paid earners will simply have to factor in the new tax reality.
Tech workers in Silicon Valley “are not leaving to go to Florida because they’re going to save 10 percent on the state income tax,” said Shawn Elliott, a Nest Seekers broker who works in California, Florida and New York. “This is where they earn. They’re not doing it.”