The US tax overhaul, which passed in December of last year, has had many different effects on the economy and the wealth of a variety of groups and individuals. One of the lesser-known effects relates to the boom in luxury homes in Florida. The overhaul has capped both state and local deductions and made it favorable for high-income earners to relocate to Florida, where they can take advantage of the new rules.
In essence, the cap on deductions “changes the relative cost of living between high-cost and low-cost localities”, according to Gus Faucher, the Chief Economist at PNC Financial Services Group Inc. As a result, home prices in Florida are, in essence, cheaper than they are in other states. Due to this fact, there are many cases of individuals moving out of states like Connecticut and New York to southern Florida and into new luxury homes.
In turn, the new $10,000 limit on deductions is hitting some of the more affluent communities a bit harder. For lower income earners, the tax reform does not supply them with significant incentive to move elsewhere. But for high-income earners, the deductions have a significant impact. Perhaps the most ideal candidate to take advantage of the opportunity is the well-off empty nester.
Long-term, the effects of these changes will likely be reflected in adjusted home prices in the regions which have primarily seen this benefit. In fact, since the law has taken effect, the price of luxury homes has seen a 16 percent increase in the last year alone. In addition, prices for the top 5% of the most expensive properties have increased at the fastest rate in the past five years. What perhaps best demonstrates the trend is the increase in luxury home prices in Florida versus luxury home prices increase across the United States. While Florida a 16% increase, the US as a whole is sitting at only a 6% increase.
Other factors exist in the Florida market that have also increased the demand for luxury Florida homes. First, the tax change has affected wealthier Americans as a whole. The overhaul favored the rich in many ways, such as leading wealthier individuals to look for second homes at a higher rate than seen before. In addition, an increased number of baby boomers are now hitting retirement age, leading them to downsize to a more luxurious home. Often times, they are finding these smaller, yet luxurious homes in Southern Florida. While it is true there may be other factors that have contributed to the increased demand for luxury homes in Florida, the tax overhaul has implications that cannot be denied.
For the time being, the opportunity still exists for many high-wealth individuals to take advantage of the tax benefits.
