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Luxury Buyers Race to Beat New NYC Taxes

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By stockelements @ Shutterstock.com

As though New Yorkers weren’t taxed enough already, New York City has imposed a new set of transfer taxes on properties selling for $2 million or more. Buyers raced to close their real estate deals to beat the taxes which could be up to 3.15% on deals. The number of luxury deals closed in June was record-breaking. Over $4.8 billion worth of property changed hands. The WSJ’s Josh Barbanel reports:

As the deadline to beat the tax increase neared, the buying frenzy only intensified. Of the 673 June transactions of at least $2 million, 351 closed in the final seven days. That week alone accounted for more luxury closings than all but 10 individual months on record.

The cascade of deals suggests that even the behavior of very affluent New Yorkers can be influenced by the lure of a modest tax savings. The new transfer tax—a one-time payment on any property selling for more than $2 million—isn’t huge. It ranges from 0.25%, or $5,000, on a $2 million sale, to 3.15% on sales of $25 million or more.

Yet they were high enough to briefly transform the market, which had been in a slump for several years of falling sales, price cuts and rising inventory.

“A sense of urgency is the one thing that has been missing from New York City real estate for years,” said Ryan Serhant, a broker at Nest Seekers International. He said his team had its best month ever, racking up nearly $160 million in sales. “All of a sudden, there was a sprint to close.”

Residents of New York and other high tax states are desperate to shelter their wealth. Many are looking for a safe haven in the muni bond market, but that may not be such a great idea. The Wall Street Journal explains that Americans in high tax states like New York and California are jumping into municipal bonds to shelter their investments from taxation. Maybe these are residents who can flee from the high tax states they call home, as so many others have. Now that the federal government has stopped subsidizing these states’ high taxation, residents are feeling the full burden of their states’ big-spending ways.

The Journal reports:

Investors in high-tax states like New York and California are piling into municipal bonds this year, fueled in part by the 2017 tax overhaul that raised tax burdens for some high-income households.

The purchases are driven by taxpayers’ desire to generate tax-free income, and this year’s buying surge started right as taxpayers were seeing the full impact of the new law.

Mutual and exchange-traded funds containing California, New York and New Jersey munis have received a combined total of $6.5 billion in inflows this year through the end of July. The inflows marked the most of any seven-month period since at least 2014, according to Lipper. People started completing the first tax returns under the new law in late January and February.

The purchases add to the already-high demand for municipal bonds, pushing up bond prices further and diminishing the benefit taxpayers are seeking. But they also make it easier and cheaper for governments to borrow.

“High-income taxpayers oftentimes were a little bit taken aback by the fact that their tax bills either stayed pretty flat or maybe their aggregate tax bill increased. And that always raises a question of: What can I do about this?” said Suzanne Shier, chief tax strategist for wealth management at Northern Trust Corp.

The vast majority of taxpayers got federal tax cuts under the law, but 12% of those with incomes over $1 million got tax increases.

Tax-free income sounds great, but there are some issues with muni bonds that should be remembered.

First, expected returns on municipal pension funds are too high, leaving pensions underfunded.

Second, with plans underfunded, municipalities will most likely be spending more than expected out of their general budgets to finance future pension payments.

Third, there’s only so much money available to states and cities. Dangerously underfunded pensions could end up competing with munis for the scarce tax revenue, especially if cities go bankrupt. That’s a great added risk for investors.

Remember to fully recognize the risks of any investment before you lay down your hard-earned money.

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E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zilldjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com