Do changes in tax policy hurt real estate? The only areas you might expect to see a real estate sell-off due to Trump's tax policy changes would be expensive coastal cities with a large percentage of new purchasers taking out a mortgage of $750,000 or more.
Capping state and property tax deduction to only $10,000 is a big hit since the average state and property tax people pay in places like San Francisco and New York City is over $22,000.
The following counties have the most new mortgages over $750,000.
New York County (Manhattan), New York (63.8 percent);
San Francisco County, California (58.0 percent)
Nantucket County, Massachusetts (57.3 percent)
San Mateo County, California (55.2 percent)
Marin County, California (50 percent)
Los Angeles County, California
Santa Clara County, California
Orange County, California
Maricopa County, Arizona
and King County, Washington
Additional Reading: Trade War Economics And How It Affects Investors
Can Changes In Tax Policy Hurt Real Estate?
Anytime there are proposed tax changes or actual approved changes in tax law for income brackets, deductions, etc, people get nervous. Change is hard. But can Trump's changes in tax policy hurt real estate in expensive coastal cities?
What COULD happen is that weakness in these counties slowly starts spreading to other counties around the country. Price compression from the top can lead to price compression in the mid-tier and lower-tier cities.
I am on the ground in San Francisco as a real estate investor since 2003. And I can say for CERTAIN there is downward rental pressure now with an emergence of new luxury condos and uncertainty about the tax policy.
You are also seeing tremendous weakness in the Manhattan real estate market as well (4Q2017 sales -24% YoY). I expect prices to weaken, but not collapse.
Check out how rents are doing in the 12 most expensive rental markets in America. You can see a lot of big cities are down from their records, but have stabilized or rebounded. All except for New York City, Miami, and Chicago.
International US cities face international demand curves. The job engines in these expensive counties are strong enough to not see a real estate crash.
Tax Policy And Real Estate In 2021
Thankfully, Trump's tax policy didn't hurt real estate too badly. After the pandemic, real estate has come roaring back. Rents and prices are increasing nationwide.
Let's see how President Biden's tax policy will affect real estate. Hopefully, the SALT Cap deduction will be repealed, which will help boost real estate values in more expensive cities. At the same time, President Biden wants to raise taxes on those making over $400,000.
Consider Real Estate Crowdfunding
I did sell my rental property I bought in 2005 in June 2017 for 30X annual gross rent. But I did so mainly b/c I wanted to simplify life as a new father. If I didn’t have a baby, and didn’t have the desire to take care of my son full-time, I would have kept the house forever.
But by selling, I simplified my life and reinvested the proceeds in more passive income streams such as in real estate crowdfunding to take advantage of cheaper real estate with higher net rental yields around the country.
Using technology to arbitrage the cost differential is a no brainer IMO because technology allows you to work from anywhere. There’s no reason to have to pay an arm and a leg for rent or housing in SF or Manhattan anymore.
Favorite Real Estate Investing Platforms
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing. For most people, investing in a diversified eREIT is the way to go.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends. If you have a lot more capital, you can build you own diversified real estate portfolio.
Real estate investors should follow my golden rule of Buying Utility, Selling Luxury to maximize profits.
Further Reading
Here are some additional articles for further reading.