The average luxury homeowner in Williamson County, Tennessee, part of greater Nashville, has watched the value of his or her house steadily rise more than 10% over the past year—outperforming the general U.S. housing market and due, in part, to federal tax reform enacted one year ago.
The Tax Cuts and Jobs Act of 2017, effective on Jan. 1, 2018, has drawn clear winners and losers among America’s luxury housing markets. The new rules are making states with no income tax, including Tennessee, Florida, Texas and Washington, attractive to affluent individuals who expect their tax liability to rise, while dampening sales and price growth in regions of the U.S. that levy high state and local taxes.
“At this point most people know the parameters of the tax plan,” said Danielle Hale, chief economist at Realtor.com. “The luxury data already reflects this, and it’s the first place where we expected see it.”
For most individuals, the full impact of the new rules will be felt for the first time when people file returns under the new rules this tax season. Armed with more clarity, affluent homebuyers will continue to drive the dichotomy between low- and high-tax markets in opposite directions in 2019.
Low-tax Florida, which was already a bastion for retirees and ex-pro athletes, is one such winner.
Over the past year, counties across the Sunshine State have upended a list of the fastest-growing luxury markets compiled monthly by Realtor.com, replacing areas such as Brooklyn and Queens, New York, and California’s San Francisco’s Bay Area, which all dominated the luxury rankings only a year ago.
“South Florida along with the oceanside, starting with Miami and moving up the shore, remarkably are showing rising sales and rising prices,” said Jonathan Miller, a New York-based real estate appraiser who tracks a handful of key luxury U.S. markets. “I expect that is related to the tax law.”
Million-dollar-plus home sales have soared more than 20% since last year in six Florida counties, including Sarasota; Broward, which encompasses Fort Lauderdale; and Orange, which includes Orlando, according to data from Realtor.com, which, like Mansion Global, is part of News Corp.
Anecdotally, real estate agents have attributed the luxury boom to buyers from high-cost areas in the U.S. such as New York, Connecticut and even California flocking to Florida. “The Northeast is Florida’s new foreign buyer,” Mr. Miller said.
Other luxury markets riding high with help from the tax overhaul include Tarrant County, Texas, north of Dallas, where million-dollar-plus sales skyrocketed 47.2% in 2018, according to the latest data from Realtor. Luxury homeowners in Snohomish, Washington—which also boasts no state income tax—have seen prices rise 12.3% in the past year. Realtor defines luxury as the top 5% of sales.
Rather than causing a mass exodus from the less advantageous locations, the tax changes are likely exaggerating a trend that was already underway. The scale of migration to low-tax areas like Fort Lauderdale and Nashville since the tax reform won’t be clear until late next year, when the Census Bureau releases 2018 state-to-state data, said Nicole Kaeding, federal projects director at the Tax Foundation, a think tank in Washington, D.C.
It seems unlikely that taxpayers would uproot over a few thousand dollars, Ms. Kaeding said. Rather, it’s the marginal cases where the new rules hit wealthy individuals much harder.
Roughly 80% of all U.S. taxpayers got a tax cut under the new code, while 15% will see no meaningful change, Ms. Kaeding said.
Only 5% will see their taxes increase, a minority made up of filers whose income is over $500,000 per year and who pay significant sums in state and local income tax, also known as SALT, Ms. Kaeding said. The new tax code limits the SALT deduction to only $10,000, peanuts compared to the tens of thousands of dollars some in high-tax areas pay each year.
“This is someone like a New York attorney. If you’re a partner in a New York law firm, you have to pay income tax in every state where the firm works,” Ms. Kaeding said. Such a person might have written off over $100,000 in SALT under the old system. “Now the cap on the SALT deduction could mean you’re paying more in taxes.”
Even the average tax filer in Manhattan deducted a whopping $25,627 in SALT from their federal tax bill in 2016, according to the most recent data analyzed by the think tank. Californians living in Marin County, north of San Francisco, took an average deduction worth $19,334.
The new tax law also reduced the amount luxury home buyers can deduct in mortgage interest for loans taken out from 2018 onward. It’s not as huge a hit as the SALT deduction limits, but combined, the two tax changes effectively raised the cost of living and owning a home in places such as New York City, New Jersey (where residents pay some of the highest property taxes in the country), Connecticut, Washington, D.C., California and Illinois.
In all those places, home values are expected to fall as buyers and sellers adjust to the new cost of living.
Exacerbating the Slowdown
Coincidentally, President Donald Trump’s major legislative victory has deeply exacerbated the housing rout in his own hometown. Manhattan’s luxury housing market was already in the midst of a price correction when Congress passed the new tax code, which combined with rising interest rates, dramatically slowed the pace of sales in 2018—including at Trump Tower, where the president keeps a lavish triplex penthouse.
Sales of homes for $1 million or more in Manhattan have dropped 12.5% from a year ago, according to data from Realtor. In Brooklyn, such sales have slowed 8.6% during the same time period.
In Suffolk County, New York, home to the Hamptons’ posh beach towns, million-dollar-plus sales slid 16.3% since last year, as home buyers shift their vacation house hunts southward.
Manhattan-based realtor Donna Olshan, who publishes a weekly report on luxury transactions, said she expects sellers in the borough will have to discount their homes roughly another 10% to entice buyers off the sidelines.
Besides Manhattan, one need only map wealthy districts that voted out their incumbent Republican in November to find high-end housing markets feeling down on the tax reform.
Such areas include Chicago’s wealthy suburbs, where voters ousted two Republican representatives in favor of their rookie Democratic opponents.
While there’s certainly more at play in the Chicago suburbs than tax and housing woes, the correlation is undeniable. Lake County, Illinois, which includes portions of both congressional districts, has seen luxury home prices stagnate in 2018 and sales plummet. The number of houses sold for $1 million or more in Lake County fell by one-fifth in 2018, according to the Realtor data.
Fairfax County, Virginia, where both luxury home values and sales declined in 2018, voted overwhelming for the Democrat, underdog Jennifer Wexton, and helped unseat a Republican incumbent who voted for the tax reform.
Voters also flipped six house seats from high-tax, high-income California. Most notable was Orange County, a longtime Republican stronghold that helped unseat 15-term Republican incumbent Dana Rohrabacher.
“The tax reform has not been a positive thing for our market,” said John Stanaland, a leading real estate agent in Orange County, a wealthy coastal area that includes posh Laguna Beach. “It’s been a factor in the market slowing.”
There has been a significant drop-off in showings and sales, particularly for mid-range luxury homes priced between $2 million to $4 million, Mr. Stanaland said.
In contrast to Florida, high state and local taxes in Orange County have dissuaded wealthy homebuyers from making the area their primary residence.
“We used to be about a 20% second-home market. I think we’re over 40% now,” Mr. Stanaland said. The new tax code “is not necessarily a hardship, but it really annoys people.”