How does the Trump tax law impact New York property

Posted by Wei Min Tan on January 9, 2018

The Tax Cuts and Jobs Act, signed by President Trump on Dec 22, 2017, increases the after-tax housing cost for new primary residence home buyers.  Key changes as it relates to New York condominium buyers are as follows:


The mortgage interest deduction:  People buying a primary residence home can now only deduct interest on up to $750,000 in mortgage debt.  This is down from $1 million in mortgage debt previously.  Since the average Manhattan condominium is $2.6 million, and a 70% loan equals a mortgage of $1.8 million, most Manhattan condominium buyers would be affected by this change.

A home buyer in Manhattan can now deduct interest on $250,000 less mortgage debt.  Assuming a 4 percent mortgage interest rate, the new home buyer can now deduct $10,000 less mortgage interest (4% X $250,000) per year.  If his federal tax rate is 35 percent, it means the new homeowner would not be saving $3,500 ($10,000 X 35%) which he otherwise would be able to prior to this tax change.

In the larger context, considering the homeowner’s income and ability to afford a Manhattan condo, the $3,500 is a relatively small hit.


State and local tax deductions:  The impact of this change is much bigger.  Previously, all income and property taxes paid to state and local government were deductible.  Now, there is a limit of $10,000 in allowable deductions for all state and local taxes paid.  For example, a two bedroom condominium may have property taxes of $1,500 per month, or $18,000 per year.  This alone exceeds the $10,000 cap by $8,000 without counting the state and local income taxes paid, which is based on how much one earns.


Capital gains tax exemption:  The good news is that the capital gains exemption is untouched.  A taxpayer who sells his primary residence is exempted from capital gains tax for gains up to $250,000.  For married couples, the exemption is $500,000.  This is provided they live in the property for 2 out of the past 5 years.  Earlier versions of the tax proposal had requirements to live in the property 5 out of the past 8 years or had wanted to remove the exemption entirely.


The possible winner – investors?  The above affect only primary residence buyers.  Investor buyers still get to deduct all expenses including mortgage interest and property taxes.  The capital gains tax exemption never applied to investment property in the first place so that’s irrelevant as well.  Primary resident buyers make up 70 percent of the buyer pool in Manhattan.  The first two changes above make home ownership more expensive in Manhattan and increase the attractiveness of renting.

For an investor buyer, this can mean less competition from primary residence buyers.  As the market reacts to the new tax reality, we may see sellers being more negotiable amid the slow market and change in perception about the after tax cost of home ownership.  An investor buyer should be aware and take advantage of this situation.


Disclaimer:  I am not an accountant or tax attorney.  This is just my analysis which should not be taken as professional advice.    Always consult your tax professional on tax matters.


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Wei Min Tan is a property broker focusing on Manhattan, New York luxury condominiums and foreign buyers. He is often interviewed by the media including CNN, The New York Times and The Wall Street Journal on the subject of foreign buyers of Manhattan property.