Donald Trump’s “Big Beautiful” tax bill, passed by the House this week, would allow couples to deduct $40,000 in state and local taxes, up from the $10,000 cap that freaked out the real estate market in 2018.
Is this the salvation that the comatose home sales market has been waiting for?
No. But it is meaningful, at least for a certain niche of buyers and sellers.
“For people buying $1 million and $2 million homes, this is a positive,” said Bess Freedman, CEO of Brown Harris Stevens. “This is a discussion you can have with buyers — and sellers, too. It’s a positive narrative.”
That conversation starts with: “You’ll be able to deduct your property taxes” — a comforting thought for home shoppers in the New York and New Jersey suburbs, where property taxes amounting to $15,000 or more are common.
But the details of the bill are important. Let’s unpack it.
The first thing to know is that the new tax benefit — which could still be modified in Senate negotiations — starts to phase out when household income hits $500,000. It disappears at $600,000. If you earn that much, your SALT deduction limit remains $10,000 and you can stop reading (unless you’re a tax nerd).
“The big takeaway on SALT is that the increase to $40,000 will definitely help the homebuyers market in New York and New Jersey, but not as much as I thought because it phases out at $500,000 in income,” said Mitchell Snow, chair of the tax department at Adler & Stachenfeld.
“It’s not going to make a huge shift, but it is an incremental improvement. I think it’s a positive for agents.”
“Taxpayers buying high-end homes are not benefiting from this at all,” he stated. “This benefits the high net worth individuals, but not ultra-high net worth.”
Another key point is that SALT only matters for taxpayers who itemize their deductions. The standard deduction for couples this year is $30,000. If your state and city income taxes and property taxes add up to $40,000, the new bill shields at least an extra $10,000 in income from federal taxes.
If you’re in the 24 percent tax bracket, your annual savings would be $2,400, or $200 a month — enough to add $35,000 to a $1 million bid on a home at today’s mortgage rates.
“It’s not going to make a huge shift, but it is an incremental improvement,” Freedman said.
The benefit is greater if you can tack on other deductions, such as charitable contributions. Many taxpayers lost those deductions because they stopped itemizing when the 2017 Tax Cuts and Jobs Act punished a dozen high-tax blue states with the $10,000 cap.
Accordingly, the biggest gainers from the House tax bill would be households earning $200,000 to $500,000 in those same blue states, such as New York, New Jersey and California.
“There’s going to be a lower cost to folks in higher-income-tax and higher-property-tax states,” said Jaime Reichardt, a state and local tax partner at Citrin Cooperman.
He noted that the Tax Cuts and Jobs Act, which President Donald Trump signed in December 2017, slowed home-value growth in states where the SALT deduction cap mattered.
“The cap reduced the annual home price growth rate by 0.79 percentage points, which represented a reduction of nearly one-quarter the usual growth rate,” he said, citing a government study of IRS data. “The hardest hit were the expensive homes; that growth rate was slashed by 0.95 percentage points.”
That might not sound like much, but when home values grow by, say, 3 percent annually rather than 4 percent, over time it makes a huge difference. For example, a $1 million home after 30 years would be worth $2.4 million instead of $3.2 million.
In 2018, when the SALT cap kicked in, potential buyers became reluctant to bid for homes, thinking prices would drop, and potential sellers pulled their listings, not wanting to sell in a down market.
But the effect didn’t last as the shock of the SALT changes faded. Covid and record-low interest rates then spurred a homebuying frenzy in 2020 and 2021, followed by a surge in mortgage rates that caused the residential market to seize up.
Amid these wild swings, the effects of the SALT cap were forgotten, even as they continued below the surface. This year’s tariff announcements, stock market turmoil and stubbornly high interest rates have given buyers pause, Reichardt noted.
The hope, he said, is that the tax bill will restore confidence in the economy, which is a crucial factor for homebuyers.
But Freedman pointed out that confidence only goes so far when borrowing costs are rising, few homes are on the market and prices remain high.
“We need rates to come down,” she said. “Inventory, we need more. And we need prices to come down.”
Read more
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SALT shakeup: Democrats pressure Biden to repeal tax cap
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