The real estate market of New York is going through a turbulent period, with new regulations aimed at strengthening tenants’ rights, the new tax on luxury properties, and the taxing dispute between the state and IRS. The property taxes continue to rise, while the prices for apartments and commercial spaces grow at the slowest rate in six years. Several factors propel this weakening of the New York real estate market.
Manhattan Oversaturation with Luxury Property
Last year brought an oversupply of luxury real estate in the City. Manhattan homes stay on the market for a prolonged time, not what you would expect from the economic powerhouse. New York sellers face longer and longer waits to close the deal. According to reports, Manhattan properties stay on the market on average for 117 days. This is the highest number the city has experienced in 7 years.
Building in Manhattan is a challenging task since the land is scarce and expensive, so the profitable approach is to build condos and apartments for the luxury segment of the market. However, the buyers lost confidence in New York’s real estate. Cancelation of the SALT deduction made New York apartments less financially feasible as an investment for domestic buyers. Despite the over-performing stock market in which psychology was always tied to New York real estate, the buyers are cautious and expecting a market correction.
The foreign buyers slowed down the purchase of properties amid the ongoing political crisis in the U.S. This especially true for Chinese and Russian investors; their commitment to N.Y. real estate market fell off the cliff after the Anti-Russian sanctions and US-China trade war.
No Brokers Fees
New New Yorkers have always been puzzled by the sizable broker’s fees even if they discovered the apartment online. In contrast to other U.S. cities, landlords of New York often choose to hire a broker instead of working directly with the potential tenants.
New York’s competitive rental market is dominated by the middlemen- brokers, who oversee apartment listings, control viewing appointments, and lease signing. Due to this monopoly, brokers are in a position to charge up to 15 percent of the annual lease, usually collected as a lump sum from tenants before they move in. This lump payment put a significant strain on the low-income households who struggled to pay such a substantial amount upfront.
However, in February of 2020, New York State passed the addendum to the last years’ rent laws, effectively eliminating the broker’s fees. This measure is a part of the significant legislative push toward a more tenant-friendly legal environment. The new rent laws intend to protect the tenants by expanding the rent regulations. One of the measures is the cap on the application and screening fees. From now on, the tenants can be charged no more than $20 per application, including the credit report and background check. The new rental code also limits the security deposit to the amount of one-month rent, further reducing the upfront lump sum.
According to the new state guidelines, brokers can still charge a fee, but it has to be paid by the landlord except for cases when prospective tenants hired them to assist in the apartment search.
Update: The Real Estate Board of New York (REBNY) filed a lawsuit in Albany on February 10, arguing that the new rule was causing “havoc and confusion.” A New York judge halted a the new housing code provision that prohibit tenant-paid rental commissions from going into effect, by granting a temporary restraining order on February 11th. The dispute will be decided in court on March 13.
How would it affect rent prices?
Henceforth, the burden now lay on the New York landlords to pay for the brokers’ fees. Alternatively, they can advertise and lease their properties on their own, or list their property on platforms like Rentberry. These changes stimulate the market to transition to no-middleman model, where renters and landlords can find each other without the excessive fees.
However, New York is one of the states where brokers have substantial leverage on the rental market, and currently control most of the inventory. Brokers cautioned that the new regulation would result in the increase in monthly rent since landlords would compensate for the paid broker’s fee with a higher rent price. This is partially true since New York has regulations that cap how much rent can be raised. There are almost 1 million rent-regulated apartments in New York. However, there are also around a million non-regulated apartments that might be affected. The majority of non-regulated inventory is in Manhattan and East Brooklyn, the new price hike will hit those areas the hardest.
Last year, New York real estate was in a frenzy, as sellers rushed to close deals on their luxurious properties. The banners on the listing websites were screaming: “Take advantage before the mansion tax goes up”. The matter is, on July 1 the new tax hike came in effect.
The mansion tax is not a novelty for New York. Previously you had to pay an additional 1% for the property sale of $1million or more. The new tax increase will introduce an incremental progressive scale. From now on, you have to pay from 1.25% for $2 million to 3.9% for $25 million and above. The city government expects to receive an additional tax revenue of $356 million a year, a direct those funds toward the crumbling subway system. The real estate agents warn that in today’s sluggish market, the sellers will bear the cost of the tax increase, which will result in price reduction, more days on the market, and even more sluggish sales.
Tax Wars: The SALT cap
In September 2019, a federal judge in New York dismissed the lawsuit filed by four states, including New York, against the IRS, derailing the challenge against the $10,000 cap on the deduction of state and local taxes, commonly abbreviated as SALT.
These four states- Maryland, New York, New Jersey, and Connecticut- sued the Department of Treasure, as well as its Secretary Steven Mnuchin and the IRS, in 2018. The disputed cap on the SALT deduction is part of the Tax Cuts and Job act of 2017, the signature legislation of the Trump administration.
This measure disproportionately affected high-income and high-taxes regions, which tend to be blue states. The loss of the SALT deduction substantially impacted New Yorkers, who pay one of the highest state and local property taxes in the nation. This policy change spooked the New York buyers, making them more cautious, while sellers are slowly adjusting to this new tax landscape. The elimination of the tax credit, is also a factor in the surging rental prices since landlords are trying to compensate for the lost revenues.
The state representatives considered this bill an attempt to politicize the Tax Code and alleged that it is an “unconstitutional assault on states’ sovereign choices.”
“There is no doubt in my mind that President Trump’s unfair tax policy targets New York and other blue states by funding tax cuts for corporations and the rich on the backs of New Yorkers.” Andrew Cuomo, Democratic Governor of New York, said in a statement.
Nevertheless, U.S. District Judge J. Paul Oetkan dismissed the suit, stating that states failed to provide sufficient evidence or legal reasoning that the new SALT limits are unconstitutional and violate the state rights. However, the battle is far from over.
In an attempt to counteract the limits on SALT deduction New York, Connecticut, and New Jersey, adopted legislation that would allow municipalities to create charitable funds for the needs of the city services and provided state tax credits to encourage the donation from the homeowners. In essence, it is a workaround that allows avoiding SALT cap, the homeowners can now write off the charitable donation to the city on their federal tax return, and at the same time receive a deduction on their state taxes.
However, in June of 2019, the Department of Treasury and IRS plugged this tax loophole, stating that the receiving the state and local tax credit for making the charitable donation, is a “quid pro quo”. The federal agencies implemented the measures to limit the deduction a taxpayer is allowed to make for their charitable donation. The objective is to prevent taxpayers from receiving both the state and federal tax credit for the same donation.
For example, if you collected 75% state or local tax credit for contribution to the charitable fund, you can now deduct only 25% of your donation on the federal tax return. For this reason, the same three states filled the second lawsuit in July of 2019, to protect the workarounds they established to allow deduction beyond the $10,000 SALT cap.
This time they also have backing from the other states since the new IRS rules are affecting over a hundred other charitable tax-credit plans across the nation from school vouchers to conservation efforts. The second litigation is still ongoing. The outcome of this tax battle will determine the amount of taxes New York property owners are obliged to pay, and will significantly impact property prices for buyers and renters.
Mariia serves as editor-in-chief and writer for the Rentberry and Landlord Tips blogs. She covers topics such as landlord-tenant laws, tips and advice for renters, investment opportunities in various cities, and more. She holds a master’s degree in strategic management, and you can find her articles in such publications as Yahoo! Finance, Forbes, Benzinga, and RealEstateAgent.