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New Tax Code Could Hit Scarsdale Hard

homepricesScarsdale residents and Scarsdale home values could both take a big hit when the new tax bill is enacted. At present the differences between the House and Senate versions of the tax bill will be reconciled by a conference committee and then enacted into law, but both versions include provisions that will be costly to many Scarsdale residents.

Both versions would hurt New York residents and especially residents in areas with high property taxes like Scarsdale as they limit the property tax deduction to $10,000 per year and completely eliminate deductions for state and local income taxes (SALT). According to the New York Times, Westchester County taxpayers are among 12 national counties that take the highest SALT deductions, with 47% of residents taking an average deduction of $34,300. However in Scarsdale, where the homeowner of an average house pays about $35,000 in real estate taxes alone, the impact of the loss of this deduction would be far greater.

The two bills differ on the deduction for mortgage interest. The limit for mortgage interest deductions are $500K for the House bill and $1mm for the Senate bill.

Moody's Analytics predicts that the elimination of the SALT deduction will cause housing prices to fall about 10%, as homes will have greater carrying costs per month and be less affordable to prospective buyers. If the House version of the bill is passed and mortgage interest deductions are capped at $500,000 in debt, this could further impact homebuyers and the Scarsdale real estate market.

David Gussman a Scarsdale resident and mortgage professional provided this back-of-the-envelope example of how a typical Scarsdale home buyer stands to fair under the new code:

Assuming a $10K property tax deduction is passed and the mortgage limit is reduced to a maximum size of $500K for deductibility of interest, Gussman determined that a new home buyer making about $500K per year buying a $1.7mm home in Scarsdale and taking a $1mm dollar mortgage could see the after-tax cost of the mortgage payment and property taxes increase by about 20% in comparison to the payment under the current tax code. The after tax cost of the 30-year fixed rate mortgage and property tax payments under the current law is $5,140 per month and after the changes it would be $6,140 per month, for a difference of $1,000 a month.

The impact will be different for different homebuyers depending upon their level of income, particular tax situation and which elements are included in the final version of the tax bill.

David Gussman is a mortgage professional who has managed ~$80B of non-agency mortgage bonds at Fannie Mae and ran product and technology for a company that collected information on every mortgage in America and provided data and analytics to holders of mortgage risk. He currently makes investments in start-up specialty finance companies and advises companies in the real estate/mortgage space. He lives in Scarsdale with his family.

Comments   

+2 #24 A. Greenstein 2017-12-12 11:16
Why do people keep voting to raise taxes?? I see in today's news :"Westchester approves first tax increase in 8 years; Astorino vows veto"
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0 #23 Almosouttahere 2017-12-11 22:50
Why win’t Scarsdale let is pre-pay next years taxes?
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+4 #22 Deb Silkes 2017-12-11 16:01
This would be true if bog houses are correctly assessed. Right now hundreds of smaller home ownets subsidize big homes.

[uote name="anonymous "]All this bashing of larger new houses makes no sense to me. The total tax collected by Scarsdale isn't going to go down, if the new houses aren't built and taxed at a much higher number, where is the Village going to go to get their money? They are going to increase the rate on everyone. Let the newcomers that want a big house pay huge taxes, it only helps everyone else.
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-1 #21 anonymous 2017-12-11 12:14
All this bashing of larger new houses makes no sense to me. The total tax collected by Scarsdale isn't going to go down, if the new houses aren't built and taxed at a much higher number, where is the Village going to go to get their money? They are going to increase the rate on everyone. Let the newcomers that want a big house pay huge taxes, it only helps everyone else.
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0 #20 A. Greenstein 2017-12-11 09:08
This will not affect the high end real estate due to the AMT. If AMT is changed it may then but on its own no.

The true issue I see is double taxation!

Quoting Prices will go down:
The tax bill will negatively impact home prices. The hi-end of Scarsdale real estate, which is already struggling, will be most affected. The cost of owning a home will go up (property tax and mortgage interest) and incomes will go down (state tax deduction).

The only silver lining is that maybe this will lead to an end to the construction of disproportionately large homes on small lots.

If there is a new reval done in the next year or two, it will likely penalize smaller homes even more than Ryan did as home prices continue o compress.
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+2 #19 C. Doullen 2017-12-09 16:11
Why would a new reval penalize smaller homes? Where is your analysis to support this? Quoting Prices will go down:
The tax bill will negatively impact home prices. The hi-end of Scarsdale real estate, which is already struggling, will be most affected. The cost of owning a home will go up (property tax and mortgage interest) and incomes will go down (state tax deduction).

The only silver lining is that maybe this will lead to an end to the construction of disproportionately large homes on small lots.

If there is a new reval done in the next year or two, it will likely penalize smaller homes even more than Ryan did as home prices continue o compress.
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-1 #18 Prices will go down 2017-12-09 07:54
The tax bill will negatively impact home prices. The hi-end of Scarsdale real estate, which is already struggling, will be most affected. The cost of owning a home will go up (property tax and mortgage interest) and incomes will go down (state tax deduction).

The only silver lining is that maybe this will lead to an end to the construction of disproportionat ely large homes on small lots.

If there is a new reval done in the next year or two, it will likely penalize smaller homes even more than Ryan did as home prices continue o compress.
Quote
0 #17 Unintended Consequences ? 2017-12-08 19:58
If SALT and mortgage interest exemptions don't artificially drive up real estate prices, then the Moodys Analytics research is incorrect and real estate prices will remain where they are if these exemptions are eliminated or greatly reduced.

But I doubt there will be zero impact, as a 10-20% swing to the negative in available mortgage payment cash will most certainly be considered in decision making by mortgage lenders and home buyers.

Quoting Jackson:
FYI, the SALT and Mortgage Interest Tax
deductions have been part of the tax law for over 100 years. Filers have been able to deduct state and local taxes since federal income tax was conceived in 1913. So don't think that these two deductions have "driven up home prices"....they've been around forever!

quote name="Unintended Consequences ?"]Mortgage interest and SALT exemptions have had some very negative effects. They artificially drive up home prices because people can "afford more house". Another consequence is that we see increasingly larger houses. Each of these things makes it harder, not easier, for people to stay in their homes in retirement or survive inevitable cycles in economic downturns.

As for the tax code in general, all the well intentioned levers and switches like the aforementioned exemptions have taken us further away from fairness and transparency in the tax system.
I would also argue that there is not one extremely wealthy person from Scarsdale in the last 25 years that has paid a penny in Estate tax unless they ignored the situation.
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+4 #16 Jackson 2017-12-08 18:10
FYI, the SALT and Mortgage Interest Tax deductions have been part of the tax law for over 100 years. Filers have been able to deduct state and local taxes since federal income tax was conceived in 1913. So don't think that these two deductions have "driven up home prices"....they 've been around forever!

quote name="Unintende d Consequences ?"]Mortgage interest and SALT exemptions have had some very negative effects. They artificially drive up home prices because people can "afford more house". Another consequence is that we see increasingly larger houses. Each of these things makes it harder, not easier, for people to stay in their homes in retirement or survive inevitable cycles in economic downturns.

As for the tax code in general, all the well intentioned levers and switches like the aforementioned exemptions have taken us further away from fairness and transparency in the tax system.
I would also argue that there is not one extremely wealthy person from Scarsdale in the last 25 years that has paid a penny in Estate tax unless they ignored the situation.
Quote
0 #15 Unintended Consequences ? 2017-12-08 10:50
Mortgage interest and SALT exemptions have had some very negative effects. They artificially drive up home prices because people can "afford more house". Another consequence is that we see increasingly larger houses. Each of these things makes it harder, not easier, for people to stay in their homes in retirement or survive inevitable cycles in economic downturns.

As for the tax code in general, all the well intentioned levers and switches like the aforementioned exemptions have taken us further away from fairness and transparency in the tax system.
I would also argue that there is not one extremely wealthy person from Scarsdale in the last 25 years that has paid a penny in Estate tax unless they ignored the situation.
Quote

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