How the SALT Deduction is Affecting NJ Real Estate Market
The 2017 Tax Cuts and Jobs Act took effect for taxpayers upon filing their 2018 tax returns earlier this year. One of the biggest changes felt by homeowners in New Jersey—the state with the highest property taxes in the nation—was the state and local tax (SALT) deductions which include property, income, and sales taxes.
Property tax deductions
The SALT deduction allows taxpayers in high-tax states to deduct their local tax payments on their federal tax returns. Before the 2018 tax year, no maximum limits were attached to that deduction amount. Anyone who itemizes can deduct property taxes; the other taxes are their choice.
However, the new tax law placed a cap, for those who claim deductions, of $10,000 for income and property taxes. Ouch! Especially for homeowners in high-end markets, with homes valued at $1 million-plus, that cap represents an enormous drop in the deduction from what those taxpayers were claiming just two years ago.
In northern New Jersey—particularly in highly taxed municipalities in Bergen, Essex, and Passaic counties—these deductions for taxpayers who itemize were highly valued when filing their federal tax returns.
As our friend Joseph Isabella, a loan officer at Investors Bank illustrated in a recent presentation to our Cedarcrest team, “If you are paying $25,000 in income taxes to NJ and $25,000 in property taxes to your North Jersey town, that $50,000 deduction goes down to $10,000.” This is certainly affecting wealthier taxpayers, who now pay a higher tax bill to the federal government. However, middle-class Americans who itemize (or had itemized), and who pay substantial property taxes, have also felt the pinch.
Mortgage interest and home equity/HELOC deductions
Another reason why the TCJA affects those with high-value homes is that the bill also reduces the limit on deductible mortgage debt.
- For loans taken out after December 15, 2017, the cap is $750,000. Loans existing on December 15, 2017 of up to $1 million are not subject to the new $750,000 cap (they are grandfathered in). This figure is based on married filing jointly status; for a married filing separately or a single filer, the cap is half ($375,000).
- If you have a loan of up to $1 million that existed on that mid-December date, you may refinance it and still deduct the interest. However, the new loan must not exceed the amount of the mortgage being refinanced.
- Interest is still deductible on second homes, subject to the $1 million/$750,000 limits.
- The Tax Cuts and Jobs Act of 2017 eliminates the deduction for interest paid on home equity loans and lines of credit for tax years 2018-2025 unless you use(d) those funds to purchase, renovate or substantially improve your primary or second home (any personal expenses are excluded, such as education or debt consolidation).
While high-net-worth individuals are seeing the biggest impact on their tax returns, the loss in deductions could be offset by the decrease of the top federal income tax rate, the doubling of the estate tax deduction, and the cutting of the capital gains rate.
Taking a broader view, these deduction limits may not have the negative effect many people fear. Due to their income or tax bracket, many taxpayers don’t qualify for itemization on their tax returns and/or are best served taking the (now higher) standard deduction. For taxpayers who are single or married but filing separately, the standard deduction is $12,000. For heads of households, it is $18,000 and $24,000 for the married filing jointly taxpayers.
Yes, New Jersey has high property taxes, but it also has some great places to live—with lots of town services and strong school systems supported by those local property taxes. John Sass, broker owner of CENTURY 21 Cedarcrest Realty, notes that, “Prior to buying or selling a home, consumers should consult with their tax advisors/accountants to see how the new tax laws may affect them, given their particular circumstances. This is especially true now as 2020 approaches. With lots of numbers to crunch and tax strategies to consider, it’s a great time to talk about tax matters related to real estate transactions with your trusted advisor.”
It’s also a great time to come talk to our real estate professionals at CENTURY 21 Cedarcrest Realty. Whether you’re looking for a new home or putting yours on the market, our team’s expertise in North Jersey real estate will help make the process a smooth one, every step of the way.
Why Are New Jersey’s Property Taxes So High?
New Jersey is a great place to work and live. Its cities are often ranked some of the best places to live in the US, and the state is home to great restaurants and sports teams, not to mention there are plenty of job opportunities being centrally located to several large cities. But, there’s one thing that often comes up in conversation when talking about New Jersey: property taxes are high. Some of the highest in the country, in fact.
A study from the Tax Foundation found that in 2009, New Jersey residents paid median taxes of $6,579 in 2009, giving them the highest property taxes in the country. It’s no wonder why residents get so angry about having to pay high taxes, but the truth is that New Jersey is highly reliant on property taxes to fund schools and government. So, looking at property tax numbers alone isn’t enough to tell the full story. Other areas may be paying the same dollar amount of taxes, just in a different form.
Here are the factors that determine New Jersey taxes, according to NJLM:
Your home’s market value
Cost of municipal and county programs and services
Cost of local public schools
Availability of revenue to cover the above costs
Extent of tax exempt properties in your municipality
Total value of taxable properties in your municipality
So, if you were to make structural renovations or additions to your property, your tax bill gets higher. If it costs more to deliver local government services and programs to your area, your tax bill gets higher. If local school districts cannot count on other revenues and their costs rise, your tax bill gets higher. When looking at the numbers, it’s important to remember all of the programs and services that NJ taxes support.
Also, NJ municipalities are highly autonomous. This offers a range of benefits to residents, including more control over local school systems and government. But, this also comes with a cost, and that cost is reflected in NJ property taxes. The more emphasis you place on having local independence, the more the municipality is to going to have to pick up these costs, when in other states, they are funded at a state level. It’s a Catch 22, really.
Bottom line: No tax is popular. There will always be some aspect of taxes that people don’t like. At the end of the day, there are many government-level programs and services that our nation’s cities need to function.