DISCLAIMER: I AM NOT A TAX PERSON. PLEASE DO NOT IN ANY WAY TAKE THIS AS TAX ADVICE. I AM SIMPLY ADDRESSING SOMETHING THAT PEOPLE HAVE ASKED ME ABOUT OVER AND OVER AND POINTING OUT THAT THIS IS PROBABLY NOT THE MAKE OR BREAK REASON FOR MOST PEOPLE TO BUY OR NOT BUY. OK. ENJOY!
My background is not in finance, but working in real estate I am asked a lot of questions about the financial side of buying. While everyone needs to speak to a financial advisor rather than seeking expertise from someone like me, I do my best to chat with CPA’s and wealth managers on a regular basis so I can be informed about everything from types of trusts to the tax code to financing options. One thing that EVERYONE has been talking about this year is the newly imposed limit on SALT deductions that unfairly impacts high-tax states like NY, NJ, and CA. In case anyone reading this is unaware, the new tax code was specifically written to help millionaires who live outside of major, liberal cities. And I hate absolutely everything about it. But NY is fighting back, which is the NY Value here. And I’ll explain how in a minute!
SALT, or “state and local taxes,” have historically been deductible when you file your taxes at the federal level. Essentially this means that you pay them with pre-federal-tax income, which saves you money. This includes your property/real estate taxes, and was another incentive to buy property rather than rent. In high-tax states it meant that homeowners often itemized their deductions instead of going with the standard deduction, in order to get this benefit on ALL their state, local, and real estate taxes. While the new tax code raised the standard deduction, it simultaneously imposed a cap on how much you can deduct for these taxes specifically, which is why this is only a problem for homeowners who live in high-tax states and cities.
What does this mean? If you read the clickbait headlines it means EVERYONE RICH IS FLEEING NYC for states like Texas and Florida. (And by fleeing I mean keeping their properties in NYC but using different addresses as their primary residences). NYC is totally screwed and you should never buy anything ever again! Real estate is over! Everyone panic!
What does it actually mean? It honestly depends on your income, your tax bracket, and how expensive a property you own. At worst, it makes it slightly less beneficial to buy compared to renting than it used to be. But you still aren’t paying rent! There are plenty of reasons to own outside of a tax deduction.
How has NY tried to combat this? They offered charitable contribution tax credits. The Trump IRS (I’m just going to call it that, even though it’s unclear he even knows what the IRS is cuz homie don’t pay taxes) fired back late last year stating that any charitable contribution tax credits need to go towards this same $10,000 limit. This specifically targets high tax (read: liberal) states and high tax (read: liberal) cities. Cool, guys. Real cool. Props to New York for not taking this one lying down.
Again, I don’t work in finance. I made my CPA friend look at this to make sure I wasn’t just flat-out lying, but I’m sure there is nuance I’m missing. And, again, whether buying in NYC makes sense to you is dependent on so, so many factors. It’s easy to look at the news and feel conflicted that it’s both “totally a buyers’ market” but also “a terrible time to buy because of tax implications” and “mortgage rates are historically low!” but “what’s happening with inventory!!??” I’ve said it before and I’ll say it again; you can’t time the market.
And, again, as I always say, buying a home is personal as well as an investment. Looking at it from a strictly emotional OR financial standpoint is not the move. You need to consider so many different factors to find the right property type and situation for you.
Don’t be freaked out by headlines, ignore the noise, and I’ll be back VERY SOON with more info for buyers’ month!