On Thursday, House Republicans released their long anticipated tax reform plan. If it becomes law — and that’s still a big if — it could have a major impact on New York City’s real estate industry. Here’s how:
NYC homebuyers would have to pay, dearly
House Republicans proposed what some observers consider politically impossible: cutting into the mortgage interest deduction. The plan would limit the benefit to mortgage debt of $500,000 or less, down from a current $1 million. That might not matter much in cities like Detroit or Atlanta. But in Manhattan, where the median apartment sales price is $1.17 million, the change would make it harder for people to buy homes, which would cut into demand, hurting sellers and developers. The real estate lobby is likely to put up a fight.
“Eliminating or nullifying the tax incentives for homeownership puts home values and middle class homeowners at risk, and from a cursory examination this legislation appears to do just that,” National Association of Realtors president William Brown said in a statement Thursday.
“It’s very good news for owners of multifamily,” said Ken Weissenberg of accountancy EisnerAmper. As demand for mid-market condominiums falls, more people may choose to rent.
The GOP plan would also end the federal deduction of state income taxes. This would raise the bill for residents of states with high local taxes — such as New York. “We remain very concerned about the proposed elimination of state and local tax deductibility,” REBNY’s president John Banks said in a statement. “It is not only unfair, but would have a negative impact on middle-class taxpayers as well as state and local governments across the country.”
But condo developers could save big bucks
Scrapping tax deductions might hurt condo sales, but it’s not all bad news for developers. The plan would lower the top tax rate pass-through entities, such as LLCs, pay on their earnings to 25 percent, down from 39.6 percent.
One of the main reasons some developers shy away from condos today is that profits are taxed at the personal income tax rate, while rental developers pay the much lower capital gains rate. It’s not entirely clear if condo profits qualify as passive income, and by extension for the new 25 percent tax rate, Weissenberg said. But even if they count as active income, 30 percent of profits would be taxed at the new, lower rate — still a meaningful tax cut.
1031 lives!
There’s been plenty of anxiety over 1031 exchanges, which allow property owners to avoid taxes on profits from property sales if they reinvest them into real estate. In June, the Wall Street Journal reported that some lawmakers wanted to get rid of the benefit. For now, they lost out. The GOP tax plan keeps 1031 exchanges for real estate in place. As a bonus, it would also repeal the estate tax.
Affordable housing is in trouble
If property heirs have some reason to cheer, builders — and renters — of affordable housing face a grim future. The GOP’s proposal to lower the corporate tax rate to 20 percent from 35 percent would make Low-Income Housing Tax Credits less appealing to investors because their value falls along with the tax bill they help offset.
House Republicans also want to get rid of the tax deduction for so-called private activity bonds, which includes housing bonds issued by the state Housing Finance Agency. “It’s generally very bad news,” said attorney Richard Goldstein of Nixon Peabody, adding that tax-exempt bonds fund about half of all new affordable housing units. Thanks to the tax exemption, housing bond investors have been willing to accept low yields which kept financing costs for developers low. That would change under the GOP Plan.
Advocacy group New York Housing Conference called the proposed changes a “devastating blow” to affordable housing and estimated that they could cost the state 17,000 affordable units per year.