The Tax Overhaul Could Mean Falling Home Prices and Less Affordable Housing

The Senate this week is expected to vote on Republican-sponsored legislation to overhaul the nation’s tax code. A vote could come as early as Thursday, but before that happens, there’s going to be a lot of horse-trading to secure enough Republican votes to pass the bill (Democrats are united in their “no” vote).

If it feels like this all happening really fast, it is. Republicans want to get a bill to the President to sign before Christmas. In the rush, keeping track of any changes in the Senate’s version is challenging. And if a tax bill does get more than 50 Republicans, then the legislators from both chambers will have to meet and iron out the differences between the two bills.

So while there isn’t a final version yet, it’s clear from the House bill and the outline from the Senate for how it plans to pay for tax cuts (that will still add $1.4 trillion  to the deficit over the next 10 years) that the tax overhaul will affect homeowners and renters in the New York City and New Jersey area.

1. SALT. Yes, you need to watch how much you consume. But we’re talking about "State and Local Income Taxes" and we live in a high tax region (I’m looking at you, New Jersey homeowners). The House bill eliminates deductions for these taxes and caps property tax deductions at $10,000. The Senate eliminates all these deductions. If you itemize your taxes each April and pay a lot in these taxes, an increase in the standard deduction might not be enough to replace these deductions. State and local leaders are likely to find it more difficult to raise taxes to pay for other programs when individuals are not able to write-off local taxes. For example, New Jersey Governor-elect Phil Murphy wants a millionaire’s tax to help pay for property tax relief and school funding. Who wants to be taxed more without a corresponding federal deduction?
2. MID. The mortgage interest deduction. The House bill limits the deduction to the interest paid on new mortgages up to $500,000. The Senate leaves the MID unchanged at $1 million. If the House version wins the day, it could lead to a drop in home prices in our region. Why? Because the tax benefits of the interest deduction can encourage people to take out larger loans to buy more expensive homes; without it, people might hesitate to take out a large mortgage (especially if the property tax deduction is eliminated). If you own in New York City, you likely have a large mortgage and are benefiting from itemizing your taxes to take advantage of the MID. According to StreetEasy, in the three months ending this past October, nearly two-thirds of homes in New York City sold for over $500,000; in Manhattan, it was 87 percent. Douglas Elliman Real Estate reported that the median home price in Manhattan for that same quarter was $1,170,000. While neither the House nor the Senate bills propose eliminating the MID all together, a study from the Federal Reserve Bank of Cleveland found that doing so could result in home prices dropping as much as 11 percent in New York City. 
3. Affordable Housing.  The House eliminates “private activity bonds” which are tax exempt bonds that New York City uses to finance the construction of affordable housing (they are used by state and local governments for many uses throughout the country). Deputy Mayor Alicia Glen said that the elimination of these bonds “would have a significant impact in several different ways in our ability to finance housing at the pace we have been currently operating under.” The mayor’s office said that these bonds provide about $2.6 billion annually in affordable housing work. Others have reported that translates to about one-third of the financing for the affordable housing Mayor Bill de Blasio wants to create. In addition, the House bill eliminates two tax credits — the Historic Tax Credit and the New Markets Tax Credit — the first is used to preserve historic buildings and the second to stimulate economic development in economically underserved communities. Examples of buildings that have benefited from these credits include the Kings Theatre in Brooklyn, projects at the Brooklyn Navy Yard, the Greenpoint Manufacturing and Design Center, and the Apollo Theater. Currently, the Senate bill leaves these tax credits in place, with some slight changes.