Divorcing parties and their attorneys take great care to reach a realistic valuation as to real property – hardly an easy feat.
What constitutes a realistic valuation for real property has, however, become even more difficult gauge in light of the pandemic, and legislation passed in response thereto.
In the early days of the lockdown, many homes were pulled off the market, with homeowners in certain states wary of (and in other states, including New York, unable to) host open houses.
Now, with certain of those same states entering into phased reopening and with a second stimulus bill on the table, there is talk of legislation that would lift the SALT Tax Cap, potentially driving another big shift in housing markets in New York and other high-income states.
What Is the SALT Tax and to Whom is it Relevant?
The SALT deduction is a tax provision that allows taxpayers who itemize their taxes to write off state and local taxes, including property taxes.
This much is nothing new. In fact, ability to deduct nearly all state and local taxes was part of the federal income tax code when it was first created, in 1913.
In certain states where property taxes range into the tens of thousands, the SALT deduction was, for many years, a significant source of savings for homeowners.
What Is the SALT Tax Cap?
In January 2018, the SALT deduction was eliminated by the Tax Cuts and Jobs Act, Republican-backed legislation that capped state and local deductions at $10,000 for all SALT income, property, and sales taxes combined.
Previously, there was no limit.
For many residents of high-income states like New York, which on average take high deductions for state and local taxes, the change was significant, and there was great concern about how the new cap on deductions would affect residential property sales.
How Might the Pandemic Impact New York’s SALT Tax Cap?
On May 15, 2020, the House passed the HEROES Act, the $3 trillion dollar follow up to this year’s first stimulus bill, the CARES Act. Among the many provisions therein is one that would suspend the SALT Tax Cap entirely for two years. With the Cap suspended, houses in areas with high property taxes become more marketable, since potential buyers can use the deduction to offset the financial impact of their purchase.
Before it becomes law, however, the HEROES Act must make its way through the Senate where, it is widely speculated, the two-year suspension of the SALT Tax Cap will be removed. Although many believe suspension of the Cap would provide the housing market with a much-needed boost, others see it as yet another tax break for the wealthy. More importantly, the states that would benefit most (those with the highest property taxes) are largely “blue” states, and the Republican-controlled Senate is in no rush to come to their aid.
Accordingly, it remains to be seen how the housing market will respond to the pandemic, and whether or to what extent legislation, such as the SALT Tax Cap and proposed suspension thereof, may impact that response. In the meantime, divorcing couples and others in New York looking to value their homes face as much, if not more, uncertainty than ever.