Cap on deductions could cause a slowdown in high-end home sales

The federal tax overhaul’s new $10,000 cap on deductions for state income and local property taxes is likely to draw more attention to the stark differences in Long Islanders’ property tax bills. Some local real estate agents and accountants predict it could boost demand for lower-tax homes and cause a slowdown in the luxury market.

The impacts on local communities are likely to vary as widely as Long Islanders’ tax bills — which is to say, a lot. The average property tax bills in Long Island communities range from a low of less than $7,000 in Mastic Beach, Uniondale, Inwood and Riverhead to a high of more than $52,000 in Old Westbury, a Newsday analysis of Internal Revenue Service data shows.

As home buyers come to grips with the changes, some are anticipated to demand discounts on asking prices to make up for higher tax bills, or seek lower-tax properties, housing and tax experts said. For those already considering a move to a lower-tax state, the new tax code could serve as one more reason to leave, and for renters it may be a deterrent to buying.

The result could be tense negotiations over the prices of high-end homes, and a potential decline in values, real estate experts said.

“It’s not dollar for dollar, but the more you pay out because of the loss in deductions, the more it impacts the value of the home,” said Jonathan Miller, chief executive of Manhattan-based appraisal company Miller Samuel. “High-cost housing markets across the country are all going to go through this gyration, or this price discovery period . . . Buyers are eager to benefit from any potential discounting immediately, or almost immediately, and sellers are slower to adapt.”

The new limit on deductions also may lead to stiffer competition for the already scarce supply of homes with comparatively low tax costs, real estate brokers said.

It takes “a minor miracle” to find a home in Huntington with less than $10,000 in property taxes, said Barbara Wanamaker, owner of Prime Properties Long Island in Huntington.

The new limit “does affect the high-end houses a lot,” said Edith Yang of Douglas Elliman Real Estate.

Now, she said, “if you’re talking about young people moving from Queens to Long Island, they say, ‘I don’t want my property taxes to be more than $12,000,’ ” she said.

Not all buyers are fazed by the cap on deductions, though. Those buying properties listed for $3 million or more, Yang said, usually “don’t care about taxes that much unless it’s more than $50,000.”

The full impact of the tax changes won’t be felt until April 2019, when this year’s taxes are due. That’s when taxpayers will face the new limit on deductions for state and local tax payments, including income and property taxes. The cap is one element of the sweeping tax overhaul enacted in December, which lowers tax rates and nearly doubles the standard deduction.

Many buyers are not yet aware of the changes, real estate agents said.

First-time buyers especially “are just not in the know yet,” said Jamie Gorman of Charles Rutenberg Realty in Plainview. “I always tell my buyers, ‘Work with a mortgage broker or a banker so you’ll know what you can afford.’ ”

The cap on deductions “effectively makes buying a home more costly,” said John Rizzo, chief economist for the Long Island Association, the region’s largest business group. The likely result, he said, is that “more people will consider moving into communities with relatively lower property taxes, especially people who don’t have school-age children.”

For homeowners with very high tax bills — say, $60,000 or more — the scaling back of federal deductions for state and local taxes will be “a hit on the value of their homes,” said Jude Coard, chair of the tax department at Berdon LLP accountants in Jericho.

Luxury home buyers, he said, “probably won’t pay what they would have in January 2017. . . . If they can use this as a way to get a lower price, why not?”

Gary Epstein, a certified public accountant and partner at Zapken & Loeb LLP in Woodbury, said some of his clients who own finance, real estate and health care businesses are considering relocating to Florida.

The move could save them more than 15 percent in income taxes alone, because Florida has no state income tax, he said.

Scaling back the federal tax break, he said, “only compounds the anguish of having to pay state taxes and not even getting the deduction for it.”

To be sure, many Long Islanders will see their overall tax bills decline as a result of the overhaul. The impact on individual households will vary widely, depending on factors such as:

• Tax rates, which have fallen to a maximum of 37 percent for individuals, down from the previous maximum of 39.6 percent.
• Source of income, since certain businesses will pay lower taxes.
• Number of dependent children, because the new tax law eliminates personal exemptions but doubles the per-child tax credit, to $2,000, and expands it to more families.

The near-doubling of standard deductions, to $12,000 for single taxpayers and $24,000 for married couples, is likely to benefit many Long Islanders with low or moderate incomes, accountants said.

The highest earners might benefit so much from lower tax rates that the loss of deductions might not make much difference, especially if the economy and stock market perform well, some real estate agents said.

But those in the middle — especially those stretching to afford a home — could feel the effects more.

Homeownership will “become more costly for this group, and they will seek to buy smaller homes with lower property taxes,” Rizzo predicted.

Taxpayers need to find out how the changes will affect them, accountants, real estate agents and housing counselors said.

“It’s important for people to come in — now more than ever — for counseling and education to really understand how that all plays out,” said Gwen O’Shea, chief executive of Community Development Corp. of Long Island, in Centereach, which offers housing counseling.

The ability to take a deduction for property taxes is just one factor in home buyers’ decision-making, in addition to income prospects and job security, savings and investments, mortgage interest rates, local schools, quality of life and an expectation that a home’s value will grow, real estate agents said.

“I never heard anyone say they were only purchasing a home because they could deduct the property taxes from their income on their tax return,” Deirdre O’Connell, chief executive of Daniel Gale Sotheby’s International Realty, said in an email. However, she said, “This may very well affect the affordability of where and what they ultimately buy.”

On Long Island, the new limit is starting to draw more attention to dramatic differences in local tax bills.

More than half of homeowners in Nassau County and nearly 33 percent in Suffolk County pay $10,000 or more in property taxes — compared with the national rate of 4.4 percent — according to Attom Data Solutions, a California-based real estate information company.

Nearly 26,000 Nassau residents paid at least $20,000, and 9,000 paid more than $30,000, a county spokesman said last year.

In Nassau, taxpayers claimed an average $23,856 in deductions for state and local property, income, sales and other taxes in 2015, almost twice the national average of $12,471, the most recent IRS figures show.

In Old Westbury, where stately mansions preside over 5-acre lots, residents claimed an average of more than $138,000 in deductions for all state and local taxes, including $52,446 in property taxes alone, IRS figures show. Homes in Old Westbury commanded a median price of just over $2 million last year, according to Daniel Gale.

In Manhasset, whose bustling commercial district includes the Americana mall, households’ tax bills were less than half the amount in Old Westbury: about $63,000 in state and local taxes, including about $22,400 in property taxes. Manhasset’s median home sale price was $1.6 million last year, Daniel Gale reported.

Many Long Islanders remain willing to pay high taxes to live in a desirable community.

“If you’re not buying, you’re not getting into Syosset, Jericho, Bellmore, Hewlett — there aren’t a lot of rentals, and that’s how you get into the better school districts,” said Jeff Gold, a Bellmore attorney and former member of the Nassau County Assessment Review Commission who runs a 17,000-member Facebook group for people interested in grieving their taxes.

The disparities between communities are caused to a large degree by variations in local home values, school costs and commercial development, which can bring down residents’ tax bills, Gold said.

Suffolk County residents pay lower taxes, an average of $18,413 for property, income and other taxes in 2015, IRS figures show. But they face widely varying bills, too.

In Cold Spring Harbor the average state and local tax bill was more than $58,500, including nearly $24,000 in property taxes.

By contrast, in Ridge residents paid an average of less than $12,000 in state and local taxes, including less than $8,000 in property taxes.

More than 150,000 homeowners in Suffolk paid at least $10,000 in property taxes, and more than 15,000 pay at least $20,000, Attom reported.

Low property taxes were a priority for Phill Hyland Sr. and Debbie Cody as they shopped for a home together. They are negotiating to buy a new two-bedroom condominium in the Foxgate at Islip community in Central Islip, listed for $305,000 with taxes of about $6,500.

Keeping the taxes low “means that we can spend on each other and any upgrades we need for the condo,” said Hyland, 54, a letter carrier who lives in Copiague.

“We really didn’t want to pay more than $8,000,” especially since they don’t have school-age children, said Cody, 47, an administrative assistant who lives in Farmingville. “We want to live within our means, not overextend ourselves.”

By Maura McDermott

maura.mcdermott@newsday.commauramcdermott

Maura McDermott covers health care and other business news on Long Island.