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Potential Changes in Economic Policy and Their Hypothetical Impact on Luxury Housing Market

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Wednesday February 17, 2021
Potential Changes in Economic Policy and Their Hypothetical Impact on Luxury Housing Market

Now that President Biden’s administration is underway, the luxury housing market is watching for signals that new economic policies are coming; many of the potential changes would have a direct impact on the market. To be sure, many in the luxury housing market feel that there is significant uncertainty in the future.

The Democratic Party has championed arguments in favor of tax reform, and it is likely that we will see some kind of reform during President Biden’s administration. Given that the majority of tax reforms will mostly impact individuals who make $400,000 per year, or $1 million per year in capital gains, it is clear that the luxury housing market will be impacted by whatever changes come about. This article will briefly discuss potential changes, and how they will impact the housing market.

SALT Deduction Cap
Some experts believe that the Biden Administration will remove the $10,000 cap on state and local tax deductions (“SALT”). In 2018, the Trump Administration placed a $10,000 limit on SALT, which had a notable impact on tax-heavy locations like New York and California. In the event that SALT caps are removed, it is possible that the already thriving luxury housing market in California will perform even better. As a practical effect, more potential buyers in the already-low-inventory California will drive housing prices up even further.

Increased Tax Rates
Whenever the Democratic Party holds the Presidency, there is talk that income tax will increase; given the tenor across the nation recently, this may be the case. More importantly, the general tone of discussion suggests that higher-income earners will likely carry the bulk of the potential tax-burden. While this may reduce buyers’ price-points, the housing market itself won’t suffer drastically. Given that any income tax-hike will be a Federal tax, potential-buyers are less likely to abandon California for cheaper states. At the end of the day, an income tax hike would be felt equally across all states.

Increased Capital Gains Tax
As it currently stands, homeowners can deduct $500,000 in profits if they’re married ($250,000 if they are single) on the sale of their primary residence (this doesn’t cover secondary homes). Anything above the appropriate limit is taxed at an income-determined rate; the highest earners are taxed at 20% of the capital gains above the deductible amount.

Oddly, an increase in capital gains taxes may actually benefit sellers in low-inventory areas. As capital gains tax increases, less people will want to sell their homes; in theory, many sellers may opt to wait until a new administration is in place in the hopes that capital gains tax is reduced. The less people selling their home, the lower the inventory. When inventory is low and demand is high, selling prices increase significantly. The real question is whether prices would increase enough to offset whatever the capital gains tax is increased to.

At the Chernov Team we understand that knowledge is power, and knowledge of how future tax policy will impact the luxury housing market is powerful knowledge indeed. At the Chernov Team we know that whoever comes to the table with the most leaves with the most, and the Chernov Team always leaves the table with the most.

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