New Tax Code Hits Westchester Hard

In 2016, Westchester County ranked first in the nation in property taxes. Westchester residents paid on average $16,500 a year in property taxes, according to a report from ATTOM Data Solutions. High taxes are undermining the Westchester economy. If you were a company trying to find a location for a new office or distribution center, why would you come to the highest taxed county in the United States?
Now, we have another problem. The GOP’s tax plan is likely to advantage wealthy Americans in a number of ways, including estate-tax, private-tuition benefits, and especially commercial real estate. Yet, where the housing market is concerned, proposed changes — particularly those in the House version of the bill — are set to disproportionately affect wealthier homeowners. According to an article in The New York Times:
The bill, if enacted into law, could send home prices tumbling 10 percent or more in parts of the New York area, according to one economic analysis. It could increase the regional tax burden, complicating companies’ efforts to attract skilled workers. It could make it harder for state and local governments to pay for upgrades to the transit system and other infrastructure. And it could force cuts in federal programs that help immigrants, the elderly and other low-income residents afford the region’s high cost of living.

SALT deductions

Westchester residents and Westchester home values could both take a big hit when the new tax bill is enacted. At present the differences between the House and Senate versions of the tax bill will be reconciled by a conference committee and then enacted into law, but both versions include provisions that will be costly to many Westchester residents.

Many of the states with the most expensive housing markets, which include California, New York, and Hawaii also happen to lean Democratic. And while it might be a stretch to say the tax changes target blue states, they almost certainly would hurt high-income areas more.
Both versions would hurt New York residents and especially residents in areas with high property taxes like many areas in Westchester as they limit the property tax deduction to $10,000 per year and completely eliminate deductions for state and local income taxes (SALT). According to the New York Times, Westchester County taxpayers are among 12 national counties that take the highest SALT deductions, with 47% of residents taking an average deduction of $34,300. However, in for example, Scarsdale where the homeowner of an average house pays about $35,000 in real estate taxes alone, the impact of the loss of this deduction would be far greater.
High-income households are more likely to benefit from SALT and claim the deduction compared to other income groups, the center’s research found. Among households earning $200,000 to $300,000 per year, 93% claimed the SALT deduction, compared to 39% of households earning $50,000 to $75,000.
According to the Tax Policy Center, state income, local income, and real-estate taxes make up the bulk of the SALT deduction.
That disadvantages states like New York which have high state and local taxes, and where taxpayers itemize these deductions instead of taking the standard deduction.
And so instead of the promised tax cuts, many could be paying more to the federal government.
The two bills differ on the deduction for mortgage interest. The limit for mortgage interest deductions are $500K for the House bill and $1mm for the Senate bill.
Moody’s Analytics predicts that the elimination of the SALT deduction will cause housing prices to fall about 10%, as homes will have greater carrying costs per month and be less affordable to prospective buyers. If the House version of the bill is passed and mortgage interest deductions are capped at $500,000 in debt, this could further impact homebuyers and the Westchester real estate market.
David Gussman a Scarsdale resident and mortgage professional provided this back-of-the-envelope example of how a typical Scarsdale home buyer stands to fair under the new code:
Assuming a $10K property tax deduction is passed and the mortgage limit is reduced to a maximum size of $500K for deductibility of interest, Gussman determined that a new home buyer making about $500K per year buying a $1.7mm home in Scarsdale and taking a $1mm dollar mortgage could see the after-tax cost of the mortgage payment and property taxes increase by about 20% in comparison to the payment under the current tax code. The after tax cost of the 30-year fixed rate mortgage and property tax payments under the current law is $5,140 per month and after the changes it would be $6,140 per month, for a difference of $1,000 a month.
The impact will be different for different homebuyers depending upon their level of income, particular tax situation and which elements are included in the final version of the tax bill.
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