What Changes will U.S. Real Estate Tax Usher in 2022?
The soaring house prices and the controversial adjustment of the SALT deduction limit will become uncertain factors in front of the owners. Although rising house prices may indeed lead to an increase in real estate tax, the relationship between the two is not automatic. In fact, the owner’s property valuation will not change until the local appraiser believes it is necessary to increase the property valuation, and the adjustment may occur this year or five years later, depending on the work arrangement of the appraiser’s office.
Some municipalities increase tax rates to make up for expenses, but with the support of federal funds, the rate of increase in interest rates may not be as significant as in previous years. Some other regions have taken the initiative to lower their tax rates to help residents ease the tax burden that has become more and more heavy in recent years.
In addition, as state-and-local-tax (SALT) deductions are expected to increase, property owners with high incomes may get a respite. The latest tax law introduced in 2017 limited the SALT deduction limit to less than $10,000, which surprised everyone. Since then, legislators from high-tax states have been trying to abolish the limit. At present, their efforts have already begun. In the “Build Back Better” passed by the House of Representatives last month, the parties concerned proposed to increase the upper limit of the SALT deduction to US$80,000. Although the restrictions on the “1031 Tax Deferred Law” (1031 Exchanges) have been temporarily shelved, the Biden administration may restart this proposal in the near future. According to current regulations, real estate investors can delay the payment of capital gains tax if certain conditions are met.
Rising house prices do not immediately affect real estate taxes
According to a report released last week by the real estate portal Realtor.com, by the end of this year, the median house price in the United States is expected to rise by 12%. Ultimately, this will push up property valuations, which in turn will lead to an increase in property taxes, but this change may not happen overnight.
Marc Pfeiffer, Senior Policy Research Institute and Assistant Director of the Bloustein Local Government Research Center at Rutgers University in New Brunswick, Rutgers University, New Brunswick, said: “When will house prices change? It will be reflected in the valuation and is related to the policy of your place of residence.”
Take New Jersey as an example. Some cities re-evaluate property valuations every year, while other cities divide their jurisdictions into multiple areas and re-evaluate one area each year. For example, if a city is divided into three areas by the assessor, it is equivalent to reassessing each area every three years. Pfeiffer said that other cities in New Jersey may only reassess the entire city every five to seven years. He pointed out that in this case, the increase in house prices may not be reflected in the owner’s tax bill until many years later.
As local governments tried to raise funds for public utilities during the COVID-19 pandemic, real estate tax rates in some areas have been raised, but federal subsidies have eased the urgent needs of many communities. For example, the Chicago City Council approved the Mayor’s Lori Lightfoot (Lori Lightfoot) budget at the end of October, in which the property tax part is expected to increase by 76.5 million U.S. dollars, less than the 94 million U.S. dollars in the 2021 fiscal year. According to government officials, with the average house price of US$250,000 as a reference, the owner will pay an additional US$38 in property tax.
Cook County’s property value evaluation takes a three-year cycle, and Chicago completed a re-evaluation of the property value this year. Scott Smith, a spokesperson for the Cook County Appraisal Officer’s Office, said: “The county’s real estate market is showing surprisingly strong growth, but the average increase in real estate taxes is only about 1%.” Other areas are reducing their tax rates, including Florida. Many cities in the state and Texas have maintained fiscal revenues below the level prescribed by the state, thereby alleviating the burden on taxpayers.
State and local tax deductions are expected to increase
Recently, wealthy property owners in high-tax states such as New Jersey, New York, Illinois, and California may also be concerned about changes in state and local tax deductions. Currently, this adjustment has been included in the “Reconstruction of the Good Act.”
Pfeiffer said: “The problem of excessive taxation is particularly prominent in some of the more affluent areas of New Jersey. In these places, taxes are much higher than the state average of $9,000. Even the wealthy and wealthy are paying high tax bills. I also feel a pain when I’m in.”
According to the “Wall Street Journal” report, a bill passed in the House of Representatives last month proposed to increase the upper limit of state and local tax deductions from $10,000 to $80,000 until 2030.
Since the Trump administration introduced the Tax Cuts and Jobs Act in 2017, leaders of the democratic parties have tried every means to abolish the $10,000 SALT deduction limit. Prior to this, there were no restrictions on deductions, which meant that taxpayers could deduct all state and local taxes from the federal income tax. The current deduction limit was originally scheduled to expire at the end of 2025.
Currently, the Senate is actively debating whether to increase the SALT deduction ceiling, and the final result has not yet been announced. The Democratic Party hopes to push the bill to land before the end of the year.
The bill does not contain restrictions on the “1031 Tax Deferred Law”. At present, investors do not need to pay capital gains tax after they make a profit from selling real estate and use the income again to purchase another “similar” property. In compliance with relevant regulations, investors can repeat this process to achieve the purpose of tax avoidance indefinitely.
According to Jesse Little, Senior Director of Wealth Planning at Wells Fargo Private Bank, earlier this year, America’s Families Plan proposed to limit the amount that investors can defer taxes to $500,000 for individuals (or couples). 1 million U.S. dollars). Although this proposal has not been incorporated into the current law, it does not rule out the possibility of restarting in the future.
Little said: “Investors must bear in mind that the policy direction in the next few years is still full of variables and uncertainties. These proposals will undoubtedly become part of the next round of reforms.”