How Has the Tax Reform Affected the Real Estate Market?

How Has the Tax Reform Affected the Real Estate Market?

One of the doom and gloom theories regarding the federal tax reform, also known as the Tax Cut and Jobs Act, was that it would put a heavy burden on the real estate market. The theory was that because the reform placed a $10,000 cap on the federal deduction for state and local taxes(SALT)it would severally hurt the real estate market, especially in very expensive locations.

The reasoning was that in these more expensive cities, like San Francisco and New York, local property taxes can cost more than $10,000 by themselves. It wasn’t just the real estate industry that was crying foul, either. Many financial experts warned that this change would lower the value of homes and hurt local governments’ revenue from property taxes.

Forecasters Missed Their Mark

So how have those predictions turned out so far? As it turns out, those cries of doom and despair have been mostly incorrect. In fact, the reality is the real estate market nationwide was already showing signs of decline before the Tax Cut and Jobs Act. That makes it harder to pinpoint precisely what activity the tax change is driving. However, that being said, the new limit on the state and local tax (SALT) deduction has not caused a total real estate meltdown across the country, including in high-tax markets.

For example, even one of the most expensive real estate markets in the country, the Bay Area, has not seen any adverse effects. San Francisco, Silicon Valley and Oakland remain some of the most competitive markets in the entire country. In fact, these three markets have all enjoyed double-digit growth in sale prices in the last year.

Some Locations Seeing a Slowdown

While the results have been much better than expected in most locations, there are some markets that have seen a slowdown. For example, some residents of New Jersey have moved in order to reduce their tax bill because they can no longer deduct more than $10,000. Other markets, like Fairfield County, Connecticut have seen a big spike in the number of homes being put up for sale. And in Florida, many people who own a second home, have decided to switch their permanent residency to the Sunshine state in order to lower their tax bill.

Luxury Market Taking a Hit

One area that has perhaps taken the biggest hit is the luxury real estate market in high-tax states. For example, sales of homes worth more than $1 million in the Queens and Brooklyn areas have slowed down. On the other hand, the opposite is true for high-end homes in low tax states, such as Florida and Nevada. These have experienced the highest growth percentage in the country for luxury home sales.

What’s in Store Long-Term?

The other side of the story is how the SALT-cap deduction will affect local governments. Many financial experts still think local agencies will see an adverse effect because of this change. That’s because the $10,000 cap could make it harder for lawmakers to increase property tax rates in those areas if residents can’t write off the increased hike.

We hope you found this article about “How Has the Tax Reform Affected the Real Estate Market?” helpful.  If you have questions or need expert tax or family office advice that’s refreshingly objective (we never sell investments), please contact us or visit our Family office page or website www.GROCO.com.

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Alan Olsen, is the Host of the American Dreams Show and the Managing Partner of GROCO.com.  GROCO is a premier family office and tax advisory firm located in the San Francisco Bay area serving clients all over the world.

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