Supreme Court Rubs SALT in the Wounds of the Real Estate Market

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Those of us who live in traditionally blue states such as New York, California and New Jersey are accustomed to paying a significant amount of state and local taxes (SALT). Such taxes generally include income taxes as well as real estate taxes. However, for over 100 years prior to 2017, individual taxpayers had been able to deduct SALT on their federal income tax without limitation. For many, this deduction was an incentive to own a home and live in a high-tax area.  

It all changed during the Trump administration.

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On Dec. 22, 2017, President Trump signed the Tax Cuts and Jobs Act (TCJA) into law. The TCJA reduced personal income tax rates in most brackets and substantially reduced the corporate tax rate (from 35 percent to 21 percent). Politics aside, the TCJA tax cuts were lauded by many across the country. 

Michael J Romer Supreme Court Rubs SALT in the Wounds of the Real Estate Market
Michael J. Romer.

However, as history continues to prove, nothing is ever truly free and tax cuts have to be otherwise paid for absent a reduction of government spending. To partially offset the tax cuts, the TCJA imposed a cap of $10,000 on the amount of SALT that can be deducted each year at the federal level. The $10,000 cap was to remain in effect until 2025.

For many suburban homeowners, $10,000 doesn’t even cover the annual real estate tax bill, much less the state and local income taxes. A reasonable argument could be made that such a change to itemized deductions resulted in a substantial penalty to owners and potential owners of real estate in high-tax regions of the country. It is safe to say that high-tax states such as New York, California and New Jersey were not the targeted demographic of President Trump’s economic and tax policies.  

Still, a strong counter argument can be made that it is neither the role nor the responsibility of the federal government to subsidize high-tax states by allowing deductions for said amounts on federal income tax returns.

As a real estate professional, I believe that homeownership is and has always been the American dream. Private property rights and homeownership have been at the core of the nation’s identity since it was founded. It is hard to think back to the pre-COVID days, when the national housing market was in a much different place. Back then, many feared that the SALT cap would deter homeownership in high-tax areas. Others felt that such a cap was unfair to many taxpayers. As a result, many challenges ensued.

Numerous unsuccessful attempts to knock the SALT off the table

Since the TCJA became law, there have been many attempts made by the Democrats in Congress to either eliminate the tax cuts completely or to substantially increase the SALT caps. Most recently, in November 2021, the House passed a $1.75 trillion spending bill, which, among other things, sought to increase the SALT cap to $80,000 under the premise that the TCJA SALT cap of $10,000 was onerous to residents of high-tax states. 

In 2019, in New York v. Mnuchin, the states of New York, Maryland, Connecticut and New Jersey filed a lawsuit alleging that the $10,000 cap on SALT deductions for federal income tax purposes violated the U.S. Constitution. The United States District Court for the Southern District of New York dismissed the case after hearing the government’s motion for summary judgment. 

Then, in New York v. Yellen, an appeals court affirmed the decision to dismiss the 2019 challenge. Days ago, on April 19, the matter made its way to the U.S. Supreme Court, which rejected the challenge once and for all. Absent a change in legislation, the TCJA SALT cap of $10,000 is here to stay until 2025.

Implications of the U.S. Supreme Court’s decision on SALT

It is no secret that the national housing market has seen unprecedented activity as we continue to recover from COVID. Inspired by an insatiable demand and record-low mortgage rates, there has been much more demand than homes available. Nothing evidences the craziness of our times better than investment banks buying up residential homes all over the country. 

However, in the past few months, we have experienced record inflation and a rapid increase in mortgage rates (30-year fixed has increased almost 2 points recently!). It can be hard to see, given the amount of housing transactions taking place, but the fact is that more and more individuals are being priced out of the housing market. In high-tax states, limiting one’s ability to deduct SALT will only add to this problem. Every dollar counts in real estate, and homeownership — by actual homeowners — needs to be incentivized and not penalized.

Michael J. Romer is co-founder and managing partner of Romer Debbas.