New Tax Code Could Hit Scarsdale Hard

Scarsdale residents and Scarsdale home values could both take a big hit when the new tax bill is enacted. At present the differences between the House and Senate versions of the tax bill will be reconciled by a conference committee and then enacted into law, but both versions include provisions that will be costly to many Scarsdale residents.

Both versions would hurt New York residents and especially residents in areas with high property taxes like Scarsdale as they limit the property tax deduction to $10,000 per year and completely eliminate deductions for state and local income taxes (SALT). According to the New York Times, Westchester County taxpayers are among 12 national counties that take the highest SALT deductions, with 47% of residents taking an average deduction of $34,300. However in Scarsdale, where the homeowner of an average house pays about $35,000 in real estate taxes alone, the impact of the loss of this deduction would be far greater.

The two bills differ on the deduction for mortgage interest. The limit for mortgage interest deductions are $500K for the House bill and $1mm for the Senate bill.

Moody's Analytics predicts that the elimination of the SALT deduction will cause housing prices to fall about 10%, as homes will have greater carrying costs per month and be less affordable to prospective buyers. If the House version of the bill is passed and mortgage interest deductions are capped at $500,000 in debt, this could further impact homebuyers and the Scarsdale real estate market.

David Gussman a Scarsdale resident and mortgage professional provided this back-of-the-envelope example of how a typical Scarsdale home buyer stands to fair under the new code:

Assuming a $10K property tax deduction is passed and the mortgage limit is reduced to a maximum size of $500K for deductibility of interest, Gussman determined that a new home buyer making about $500K per year buying a $1.7mm home in Scarsdale and taking a $1mm dollar mortgage could see the after-tax cost of the mortgage payment and property taxes increase by about 20% in comparison to the payment under the current tax code. The after tax cost of the 30-year fixed rate mortgage and property tax payments under the current law is $5,140 per month and after the changes it would be $6,140 per month, for a difference of $1,000 a month.

The impact will be different for different homebuyers depending upon their level of income, particular tax situation and which elements are included in the final version of the tax bill.

David Gussman is a mortgage professional who has managed ~$80B of non-agency mortgage bonds at Fannie Mae and ran product and technology for a company that collected information on every mortgage in America and provided data and analytics to holders of mortgage risk. He currently makes investments in start-up specialty finance companies and advises companies in the real estate/mortgage space. He lives in Scarsdale with his family.