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SALT cap not hitting local market—yet

The SALT cap hasn’t made itself felt in the Rochester area’s residential real estate market—so far.

“The majority of our service area is not significantly affected,” says Andy Kachaylo, president of the Greater Rochester Association of Realtors, (GRAR) which serves 11 Central and Western New York counties, including Monroe County.

And, future sales? Well, it’s too soon to tell.

The SALT (state and local taxes) cap, part of the Tax Cuts and Jobs Act (TCJA) of 2017, limits the total deduction for state and local income, property and sales taxes that’s allowed on federal tax returns to $10,000. Should those three taxes exceed that ceiling when added up, the tax filer can’t deduct the excess.

“They, in years past, may have been able to deduct the $15,000 tax annual tax bill, whereas now, they’re losing a $5,000 deduction,” says Hunt Real Estate Regional Vice President Chip Murphy.

Before the cap took effect in January of 2018, there was no limit on the amount that those who itemized on their federal returns could deduct.

Though many tax filers probably haven’t felt the SALT cap’s effects this early in the 2018 tax season, a US Treasury audit determined that almost 11 million Americans could notice those effects.

James Schnell

James Schnell

“That cap is really targeting itemized deduction taxpayers,” says James Schnell, CPA, a partner at Mengel, Metzger Barr & Co. “That is the only pool that would come into play.”

The change in tax law will most impact those whose incomes or property values fall within a certain range.

“House prices…$250,000 to $750,000, and income ranges in excess of $250,000 and up to $750,000,” Schnell explains. “Statistically, those are the households expected to be affected the most.”

In addition, those who hold mortgages on properties valued at over $750,000 will not be able to deduct the interest on that portion of their mortgage that exceeds that amount.

“The new law dropped it from $1 million to $750 (thousand),” Schnell explains.

The cap will particularly hit residential property owners in high-tax states, such as New York, New Jersey and California.

According to the IRS, tax filers in New York state alone deducted almost $21 billion from their federal returns in 2015—and that was just in property taxes. Altogether, those who bump up against the cap will find they cannot deduct a total of $323 billion in state and local tax payments.

Rochester-area residential property owners stand a chance of being among them. The U.S. Census Bureau estimated that Monroe County alone contained 47,467 owner-occupied residential properties valued above $200,000 as of 2017. Of that group, 16,919 were valued at $500,000 or more, and nearly 800 at $1 million or more. An estimated 14,023 county residents had incomes of $200,000 or more.

Current property owners might be concerned about hitting their financial heads on the SALT cap’s ceiling, but that part of the new tax law doesn’t seem to have made itself felt in local real estate sales, particularly of higher-end residential properties.

“The SALT cap may affect the buyers, but the buyers aren’t changing their buying habits based on it,” Kachaylo asserts.

GRAR’s figures bear that out—at least, those regarding more expensive homes. In 2018, 1,280 single-family homes valued at $300,000 or more changed hands in GRAR’s service area, a close to 11 percent increase over the year before. Sales of such properties in Monroe County accounted for 811 transactions last year—just over an 8.4 percent increase over 2017. Of those sold in this county in 2018, 812 closed that had property taxes in excess of $10,000, according to Kachaylo.

The Salt cap also doesn’t seem to have changed the direction of the homebuilding industry in the Rochester area.

“We have not seen that SALT has really hindered our markets, because our sweet spot continues to be in that $250,000 to $350-$400,000 home,” says Rochester Home Builders Association CEO Rick Herman. “That’s where the majority of our builders are building.” The association represents home builders, remodelers and others in home construction in six upstate counties.

Even the construction of homes that are not in that “sweet spot” rose just a bit last year, according to figures from Herman. Building permits for single-family home construction increased in number from 1,082 in 2017 to 1,118 2018 in the area the association covers, just over a 3.3 percent boost.

The SALT cap doesn’t seem to have posed a problem for Faber Builders Inc., which builds and sells homes in Monroe County. Its offerings range in price from $184,900 to just under $500,000.

Rich Battisti

Rich Battisti

“Last year was a fantastic year—I think we closed 68 homes,” says Rich Battisti, Faber’s president. “I think we’re on pace to close 68 homes this year.”

A number of factors might have helped draw this relatively rosy picture of the post-SALT cap real estate market. For one thing, the cap took effect only last year.

“The reality of it is going to hit home much more off of this tax filing,” Schnell says. “A lot of people are getting educated about the new tax laws with their first tax return.”

Some who closed on homes last year might not even have seen the cap on their financial horizons.

“Many of those people who had purchased homes in 2018, they likely had started looking in 2017, or maybe (were) already in contract in 2017, and closed in 2018,” Murphy explains.

Even potential homebuyers who saw the SALT cap coming might not have been concerned about it if their incomes or the values of the properties they were considering purchasing didn’t fall into that $250,000-750,000 range. Wealthier potential buyers might not have cared about the cap at all.

“You start getting into a level of affluence that is not decision-driven,” Schnell says. “If somebody’s buying a million-dollar house, they could care less about what the deductions are.”

Other homebuyers might have planned to avoid the restriction of the SALT cap altogether by taking the standard deduction on their 2018 federal taxes. The tax law change nearly doubled the standard deduction to $12,000 for individual filers and $24,000 for those married filing jointly.

The picture for the Rochester area’s residential real estate market isn’t completely rosy. Overall sales in GRAR’s service area fell to 14,593 homes, a 2.9 percent drop from 2017. Kachaylo and others involved in the market blamed reduced sales on an inadequate inventory of homes.

“There’s no shortage of buyers for properly prepared and accurately priced stock,” Kachaylo says. “If there was inventory, our sales would be up.”

But it may take a while to find out the true effect of the SALT cap.

“Long-term, I think there’s still much uncertainty there,” Murphy says. “It could impact folks…with properties over the $750,000 mark.”

Mike Costanza is a Rochester-area freelance writer.

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