New Federal Tax Laws and the Upper Manhattan Real Estate Market – What Now? | Bohemia Realty
Posted on January 8, 2018

Bohemia Blog by Agent Daniel E Cohen

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Happy new year, everyone! With the start of 2018 many folks are looking forward to fresh beginnings, different outlooks, and achieving new life goals. For some, that may include thinking about finally leaving the brutal New York City rental market behind and buying their own apartment in the city. Though many people initially fear that the notoriously pricey New York City real estate sales market will be out of their grasp, they’re often surprised to find out that with the tax benefits of home ownership their net monthly housing cost can be roughly equal to, (or sometimes even less than), the cost of renting. And that’s without considering the equity growth of their investment. But 2018 brings a new 200lb gorilla to the table: the Republican Tax Plan, and with it the most sweeping changes to federal tax laws in decades. These include big changes to how homeowners can deduct their mortgage interest payments and property taxes from their federal tax bill. So what does this mean for potential New York City apartment buyers? Will they still be able to enjoy the tax advantages of home ownership to lower their monthly costs? The short answer for most people looking to buy in the Upper Manhattan real estate market is yes! But, for some there may be some effects to consider. Read on.
At Bohemia Realty Group we specialize in the Upper Manhattan real estate market, including the neighborhoods of Harlem, Hamilton Heights, Washington Heights and Inwood. In recent years we’ve seen big changes in the rental market for our neighborhoods. While there are still great deals to be found, rent prices have increased considerably. A market report from 2016 published on Streateasy.com listed Upper Manhattan as having the highest percentage rent increase on the island: 6.4% for the year. For clients looking to rent in the area, we find that buying in a co-op or condo building gives them a better bang for their buck.
I recently worked with a client who was looking for a one bedroom rental in Hudson Heights. As it turns out, she had inherited a chuck of money, and after looking at rentals in the area, we discussed using some of it toward a down payment for a purchase instead. After factoring in the tax savings she could expect from her anticipated mortgage interest and property tax deductions, we were able to find her a much nicer apartment at a comparable net monthly cost to lesser quality rentals in the area. Though her gross monthly payments on her mortgage and co-op maintenance fee (which includes the building property taxes) were going to be in the ballpark of $2300 per month, after tax savings her net monthly housing expense were estimated to be roughly $1800, less than what a comparable rental in the area would likely cost. But with the new tax laws, will this client still be able to expect these kinds of savings? The most likely answer for this client is yes, because you can still deduct mortgage interest and some property tax payments from your federal tax bill despite a few caveats.
The new federal tax law allows a deduction of mortgage interest in loans of up to $750,000. Previously the cap was $1 million. The client in my example mortgaged $300,000 of her new home, so there is no change for her there. She will still see full tax savings benefits from her mortgage interest deduction. The bigger potential impact is likely to come from the change in the way you can take state and local tax deductions (or SALT), which include property taxes. Previously there was no limit on these deductions. Now they are capped at $10,000. This means that if my client’s state and local income taxes plus the property tax portion of her co-op maintenance charges exceed $10,000, she would not be able to deduct the amount of her state, local or property taxes over the cap from her federal tax bill.
Though this is certainly something to be aware of and to take into consideration, the good news is that for most buyers in the Upper Manhattan real estate market, this should not significantly affect their bottom line monthly housing expenses, given the current state of the market. Let’s consider some numbers. The majority of homes in Harlem, Washington Heights, Inwood and the Bronx are priced somewhere between $300,000 and $750,000 depending on the size, amenities and location of the apartment. So, even if a potential buyer plans to finance 80 or 90 percent of their new home, they’ll still be able to see the full tax benefits from the mortgage interest deduction. Property tax deductions are a little trickier to figure out, and it’s important to note potential buyers are highly recommended to consult with a qualified tax professional to get an accurate picture of their individual tax liabilities. That said, an individual making $100,000 per year, should have a New York state income tax bill of roughly $5600. Assume this individual wants to purchase a condo in Washington Heights priced at about $520,000 with a property tax assessment of about $360 per month or $4320 per year. Their total state and property tax liabilities would total $9920 per year, which is still under the $10,000 cap. Note that in this example I have not factored in local New York City taxes, but even so we can see that even with the new $10,000 SALT cap Iine the new federal tax law) this individual should still see all, or most of the tax benefits from home ownership as they would under the previous tax law. Phew!
So the bottom line is that even with the changes to the federal tax law, buyers should still expect to see significant tax savings at the end of the year, particularly in the Upper Manhattan real estate sales market where property values remain relatively low in comparison to other parts of Manhattan. For the vast majority of homes available in Harlem, Washington Heights, Inwood and the Bronx you should be able to take full advantage of mortgage interest deductions. Also note that though there may be small reductions in the amount of SALT deductions some buyers can take, for most, the hit on their net housing expenses should be small to negligible.
Those of you that have little money tucked away and dream of making 2018 the year you finally own your own home, fear not. The Republican Tax Plan may have torpedoed your ability to afford the monthly costs, but the Upper Manhattan real estate sales market still represents a fantastic investment opportunity and the potential to purchase your own home for roughly the same net cost of renting! Individual cases may vary and it’s super important to consult with a qualified professional to assess your situation more accurately. Qualified mortgage and tax professionals, and of course, licensed real estate agents. If you’d like to discuss your personal goals for buying in the New York City real estate market, I would be happy to meet with you in person. Get in touch and let’s get you home.