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The Tax Reform: NY CRE Experts Weigh In

Hugh Kelly Hugh Kelly, Fordham University Real Estate Institute

NEW YORK CITY—New Yorkers will take a financial hit resulting from the Tax Cuts and Jobs Act that President Donald Trump signed into law on December 22.

The new law caps state and local tax deductions for federal tax returns at $10,000. In addition, current deductions on federal returns for interest on mortgages up to $1,000,000 for individuals or $500,000 for married couples filing separately will change. Current mortgage interest deductions will not be affected but people taking out new mortgages will now only be able to deduct interest on mortgages of up to $750,000, or $375,000 for married taxpayer filing separately.

Hugh Kelly, Ph.D. in CRE, special advisor to Fordham University Real Estate Institute, points out that the federal government spends in states outside of New York on projects that boost local economies. This includes roads, military bases, and maintenance for air travel. The funding come from the excess of taxes paid by the higher income generating states, including New York.

Greg Kraut Greg Kraut, K Property Group

Greg Kraut, managing partner at K Property Group, a New York City real estate investment firm explains that higher income states bear a larger fraction of the federal tax burden and receive lower aid. Approximately 84% of federal individual income taxes, which account for over 40% of federal revenue are paid by the those in the top 25% of the income distribution, says Kraut. Most of these taxpayers live in wealthy, urban areas, including in NY, CA, CT and NJ. Whereas, the states that are the poorest tend to get the most federal aid.

In an effort to help redress this financial burden on New Yorkers, on the same day as the president’s actions, Gov. Andrew Cuomo issued an emergency executive order to allow collection of early and partial 2018 property tax payments before the end of 2017, under the current tax laws. Executive Order #172 allows online payments to be made and mailed payments to be postmarked on or before Dec. 31, 2017.

Experts say this cannot fully relieve the long-term negative consequences that the tax law will have for New York.

Kelly says the reduction in the SALT deductions will mean lower after-tax household disposable income and this will reduce consumption. The multiplier effect will translate into less retail activity, reduced employment in trade and personal services, and potentially lower values for income-producing properties. “All New Yorkers, including the upper incomes, may see an erosion of the urban quality of life,” Kelly says.

The new law gives taxpayers less incentive to itemize. Standard deductions will increase from $6,350 to $12,000 for individuals; from $9,350 to $18,000 for heads of household; and from $12,700 to $24,000 for married couples filing jointly.

As reported in GlobeSt.com, real estate industry experts say these changes in federal deductions could make home ownership less affordable, particularly in New York and other higher-priced housing markets.

Marc Wieder, CPA, partner at Anchin accounting and advisory firm, predicts demand for home ownership will go down as fewer people will be able to purchase houses. “It’s a terrible bill. As we all know it’s going to increase the deficit,” says Wieder, “I don’t believe it’s going to save people tax dollars. I think there will be more people paying more in taxes.”

Marc Wieder Marc Wieder, Anchin, Block & Anchin

Wieder also says people will be paying more in insurance premiums with the repeal of the Affordable Healthcare Act. Other trickling effects could damage communities and school districts, according to Wieder. For example, people may not vote for a school budget because they won’t want their real estate taxes to go up when they can’t deduct them.

Although Kraut also acknowledges that some provisions of the new tax law hurt the tri-state area, he says, “At the end of the day you can’t only put blame on the federal tax plan. The states and local governments must take responsibility for their excessive and non-capped spending sprees.” He also says a more moderate and less partisan political climate could have allowed Democratic and Republican politicians to have worked together for their constituents.

Kraut also sees the tax plan as a job growth initiative, bolstering optimism and confidence in the market. He views the reduction of corporate tax including returns on pension plans, from 35% to 21%, as more money to invest back into the economy.

But Wieder and Kelly disagree with Kraut. They both express deep concerns over the nonpartisan Joint Committee on Taxation’s projection that the bill would drive up the deficit by more than $1 trillion in 10 years.

“I’ll go on record as saying the 4% plus growth rate promised by Gary Cohen will not be achieved on a sustained basis. We may get a quarter or two of higher GDP but this is not merely a question of taxes. The economy is much more complicated,” says Kelly.

Small businesses and real estate operations are often in the “flow-through” form, and could benefit from the 20% deduction granted to such entities under the new law. Forbes projected that President Trump could save $11 million per year under this provision.

Yet Wieder cautions people not to assume that they will save money. He notes that the approximately 500-page law requires tests, calculations and computations before concluding eligibility to benefit from some of its changes.

“At one point, President Trump had said after he signs into law the tax reform, we’d be able to file tax returns on a postcard,” says Wieder. “It’s the most complicated tax reform bill that I recall in my entire career.”

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