In markets throughout the nation, 2019 was a year of uncertainty, reflecting change in the basic mechanisms of how we view, buy, and sell real estate. That uncertainty extended to all markets, from traditional single-family homes to co-ops and condominiums, to commercial properties—and the same factors that affected markets in 2019 are expected to continue to reverberate in 2020.
Taxes, Real Estate, and…Taxes
When it comes to home ownership, the conventional wisdom of economists (and the government policy that followed it after World War II) held that appreciation of real estate as the primary asset of middle-class families was the most successful and secure way to build wealth and insure a comfortable retirement—particularly when combined with Social Security retirement benefits. As a result, and to encourage home purchases and long-term ownership, government at all levels offered benefits to families in the form of tax deductions. The federal government enshrined that approach by providing a deduction for state and local income and real estate taxes against income in federal income tax filings.
Over the decades since the mid-20th century, the evolution of deductible taxes has developed in two main directions, sometimes simultaneously. Some states and municipalities have enacted state and local income taxes, while others—especially at the local level—have levied higher and higher real estate taxes to provide for superior schools and other civil services. These state and local taxes (often abbreviated with the acronym SALT) became an important consideration in home prices, as they had long-term effects on the after-tax cost of home ownership. In most cases, these deductions made homes in high-tax areas more affordable, after tax considerations were calculated in the cost of ownership.
The Tax Cuts & Jobs Act of 2017 changed that. While the new law increased the dollar amount for a standard deduction by doubling it, the change also capped SALT deductions at $10,000 per year for a married couple filing jointly. That cap increased the after-tax cost of home ownership, ultimately depressing or even permanently decreasing values, and therefore prices.
Jonathan Miller is the president of Miller-Samuel Inc., a real estate appraisal and consulting firm located in New York. Miller is a national expert on both commercial and residential markets and publishes annual and quarterly reports for markets throughout the United States including New York, Boston, southeast and western Florida, California, and select markets in Texas and Colorado, among others. According to him, “2019 has been about taxes, especially in high-tax areas. The change in the SALT deduction that went into effect last year played havoc in the purchase market because it caps deductions at $10,000. It slowed down New York and its suburbs before anywhere else. In general, California tends to run a year behind New York in trends, and we are seeing similar trends pick up there now.”