When Choosing a Location in Which to Invest, Pay Close Attention to Local Issues
V.L. Hendrickson | Mansion Global | Originally published 12/18/20
From tax changes to rental rules to infrastructure plans, what’s happening nearby is of utmost importance.
Argentina passed a progressive tax that can mean a 5.25% charge on individuals with assets worth more than 200 million pesos (US$2.5 million). Photo by: Anton Petrus/Getty Images
Think globally, but buy real estate locally.
Although the economy of a country as a whole is a factor to consider when researching real estate, it’s just one of the considerations super-prime investors should take into account. They should also be examining local issues like taxation and long-term infrastructure planning as they mull the decision to invest in luxury real estate.
“Certainly, how the economies do is meaningful, but I think the local issues are critical when you’re thinking about what you're trying to do,” said Chris Pegg, senior director of wealth planning for Wells Fargo Private Bank. “There are so many different facets of buying real estate. First and foremost, of course, is the current property tax law.”
Taxes have traditionally been a very stable kind of tax, Mr. Pegg noted. But that is not the case now, either in the U.S. or internationally.
Countries all over the world are facing budget deficits caused by loss of revenue and added costs due to the Covid-19 pandemic. Many are looking at additional taxes on the wealthy to help bridge those gaps.
“The tax landscape is going to change,” according to Kate Everett-Allen, head of international residential research at the London-based real estate agency Knight Frank. “It's already changing quite radically and we expect it to even more.”
From new or increased taxes on non-resident buyers to wealth taxes under consideration, affluent buyers need to be in the know about potential new levies in the pipeline.
The long-term health of a neighborhood or development are also important to consider.
That includes local infrastructure projects that will add or detract from the city or neighborhood, the existence or future of amenities such as public transportation and medical centers, and the financial history of the building or community.
Changing Tax Policies
Avoiding highly taxed areas is a big motivator for many affluent buyers. With so many countries considering increased taxes on the wealthy, it pays to do research on evolving tax policies.
Several countries are currently considering wealth taxes, according to Ms. Everett-Allen. Argentina passed a version of the tax earlier this month—a progressive tax that can mean a 5.25% charge on individuals with assets worth more than 200 million pesos (US$2.5 million).
“Spain is proposing changes to its wealth tax,” she said. “Canada was looking at a wealth tax. There’s also discussion [in the U.K.] now about a wealth tax, potentially just a one-off wealth tax for those with income or assets over £500,000. Whether that comes off, who knows?”
U.S. states like California are also considering such a tax, and President-elect Joe Biden has said he will raise taxes on those earning $400,000 or more. His administration is also looking at capital gains taxes, which could shrink investor profits.
“We have seen a lot of pressure being put on wealthy Americans or at least proposed taxes that would directly impact wealthy Americans,” Mr. Pegg explained.
If a wealth tax were approved, it would not affect those with vacation or properties in the U.S.
Taxes on non-resident buyers are also in the pipeline.
In the U.K., non-resident buyers will be subject to a stamp duty surcharge on their purchase of 2% as of April 2021. The Canadian cities of Vancouver and Toronto already have such a tax, but Prime Minister Justin Trudeau’s administration is considering expanding the levy on the national level.
When looking at real estate purchases, it’s important to know not only the current tax policy, but what’s on the horizon. These changes don’t happen quickly, and often take years to pass, so buyers could face increases in the not-so-distant future.
It’s not just a matter of property tax rates or how much someone expects to pay, according to Mr. Pegg.
“Taxes vary in different states and even sometimes different localities. How does that property tax treat different kinds of properties?” Mr. Pegg asked. “For example, if it’s a primary residence and you can argue that it’s your primary residence, maybe there's a cap on it, but if you're buying instead a condominium, which is clearly a vacation home or an investment property, you’ve got a very different situation.”
When the Tax Cuts and Jobs Act of 2017 capped state-and-local-tax deductions at $10,000, it started a wave of moves from high-tax states, including New York, Connecticut and California. Texas, Florida and Nevada, all of which have no state income tax, have been some of the biggest beneficiaries.
The pandemic only strengthened that migration, according to Brendan Lynch, a shareholder at the Central Florida law firm Lowndes, Drosdick, Doster, Kantor & Reed.
“This is like a science experiment,” he said. “You needed a specific catalyst for people finally saying, ‘OK, what else should I be looking at?’ And Covid is the catalyst.”
As buyers look for space to spread out while working and schooling from home, they’re also seeking a lower cost of living. Investors need only look at the difference in their tax bills.
“Folks always look at that financial structure first, everything from the state income tax, or lack thereof, for Florida or Texas, to the local county millage rates,” Mr. Lynch said. “They can look at local county millage rates—property tax—and see what New Jersey is versus what Florida is and say, ‘I'm paying how much extra?’”
Financial companies are also keen to save, and several have announced they are moving their headquarters to less expensive environs.
New York City-based investment company Icahn Enterprises announced its move to Sunny Isles Beach in October, and other financial firms such as Blackstone Group and Elliot Management Group will also be opening offices in Florida. Goldman Sachs is reportedly considering a move as well. The software company Oracle recently announced it will move from the Golden State to Austin, Texas.
These companies will bring jobs, as well as increased amenities to serve the influx of new residents. Service workers will also be looking for housing, often in the rental market. Investors looking to tap into that market are also poised to do well from the continued migration.
“The jobs are bringing the people,” according to Ida Schwartz, a Compass agent based in South Florida. “Now they really are making a migration here for the lifestyle, to be close to family, for the weather and the jobs.”
Studying real estate cycles can be useful in identifying strong investments.
“New York and London have both had several years now of declining prime prices,” Ms. Everett-Allen said “There’s a sense they might be buying opportunities now as they come through the end of the property market cycle and that price growth might start to move into positive territory again.”
The trend of people rushing to the suburbs this year in search of more space and less density has added to the woes of the prime real estate market in places like New York. That’s made it even more of a buyers’ market.
Some areas have seen prices skyrocket for this same reason—families fleeing cities because of concerns about the coronavirus. Those markets may be at the other side of the cycle, and investors should consider waiting for prices to go down before making a purchase.
Ms. Everett-Allen also advises investors to pay attention to “big regeneration and infrastructure projects.” She mentioned Paris and Los Angeles, which are both preparing to host the Summer Olympics in 2024 and 2028, respectively.
“All the transport improvements that will take place around the games will have an impact on those cities,” she noted. “Paris is quite an interesting one because as well as they've also got the Grand Paris Project, which is your biggest transport project for the next decade. It's 68 new stations and four new train lines; it's massive.”
Whether it can stay on schedule during the pandemic is unknown, but the project is likely to be a positive for the city and those who live and invest there.
Real estate advisers also stress the importance of fully vetting the neighborhood or community where the property is located. Local ordinances or additional levies to support public projects could affect how the property is used or add carrying costs.
For example, the area may have restrictions on short-term rentals. For investors looking to rent out the property as a vacation spot, that makes a difference.
“The biggest thing right now is what's happening with Airbnb at a local level,” said agent Jordan Ayan, who leads the North Scottsdale Luxury Real Estate Team at the Lifestyle Collection, part of Keller Williams Realty in Arizona. “You may be coming into a state where you think it's easy to rent something out on Airbnb, but you've got to know if there is something in a specific city or neighborhood or HOA.”
And speaking of the HOA, investors need to do their due diligence when it comes to all its rules and regulations, not to mention the financial health of the building or community.
“It's critical that investors know the state of the state, the state of the locality and the state of the neighborhood,” Mr. Ayan explained.