In the first week of November, House Republicans released their long awaited tax reform plan. The GOP plan is becoming infamous in NY for its initiative to limit the federal deduction for state income taxes. Besides for that though, the plan also plans to cut cutting into the mortgage interest deduction. Currently, mortgage debt up to $1 million can be deducted on federal taxes. That incentive will be decreased to debt of $500,000 or less. In Manhattan, where the median apartment sales price is $1.17 million, that change would be an obstacle for people who wish to purchase homes, which would cut into demand, and have a negative impact on sellers and developers as well. On the other side of the spectrum, the plan may benefit condominium developers because it endeavors to lower the top tax rate which pass-through entities, such as LLCs, pay on their earnings down to 25 percent, from the current 39.6 percent.
The bulk of the burden of the tax reform would remain with the middle class in states where real estate prices as well as income taxes are high. “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,” said William Brown, President of National Association of Realtors. Powerful lobbyers from the real estate industry are expected to put up a fight. The change might be to the benefit of owners of multifamily buildings, in which demand for rentals may see an increase, as a viable alternative to buying.
The Real Deal published an article about how homebuyers in the $250,000 to $500,000 income brackets would be affected by the tax change, if that change were isolated from all other possible deductions. The finding by Triplemint broker Collin Bond and CPA Nicholas Sher was that a household with $250,000 annual taxable income would face higher taxes for both plans, if only gross annual income is considered. If purchasing a $1.25 million apartment, they would pay an additional $6,417 in taxes under the House plan, and $4,772 more under the Senate’s reforms. They found that higher income brackets would be dealt smaller tax increases as a result of the reforms. This puts a disproportionate burden on the $250,000 income bracket. “We’re showing that the folks that make less get impacted more,” said Sher.
By: Hadassa Kalatizadeh