Think globally, but buy real estate locally.
While a country’s economy as a whole needs to be considered when studying real estate, it is just one of the considerations super prime investors should consider. You should also examine local issues like taxes and long-term infrastructure planning when considering the decision to invest in luxury real estate.
“Of course, the importance of economies does matter, but I think the local issues are critical in thinking about what to do,” said Chris Pegg, senior director of wealth planning at Wells Fargo Private Bank. “There are so many different facets to buying real estate. First and foremost, of course, the current property tax law applies. “
Taxes have traditionally been a very stable type of tax, Pegg noted. However, this is not the case in the US or internationally.
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Countries around the world are facing budget deficits caused by lost revenue and additional costs due to the Covid-19 pandemic. Many are considering additional taxes for the wealthy to fill these loopholes.
“The tax landscape is about to change,” said Kate Everett-Allen, director of international housing research at London-based real estate agency Knight Frank. “It’s already changing quite radically and we expect more.”
From new or increased taxes on non-resident buyers to property taxes, wealthy buyers need to be aware of potential new levies in the pipeline.
The long-term health of a neighborhood or development is also important to consider.
These include local infrastructure projects that expand or affect the city or neighborhood, the existence or future of facilities such as public transportation and medical centers, and the financial history of the building or community.
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Change tax policy
Avoiding highly taxed areas is a huge motivator for many wealthy buyers. With so many countries considering raising taxes on the rich, it pays to research tax policy developments.
Several countries are currently considering property taxes, Ms. Everett-Allen said. Argentina passed a version of the tax earlier this month – a progressive tax that can put a 5.25% charge on those with assets over 200 million pesos ($ 2.5 million).
“Spain is proposing changes to its wealth tax,” she said. “Canada considered a wealth tax. There are also discussions [in the U.K.] Now it is a question of a wealth tax, possibly just a one-off wealth tax for individuals with income or wealth greater than £ 500,000. Who knows? “
U.S. states like California are also considering such a tax, and President-elect Joe Biden has announced plans to increase taxes for those earning $ 400,000 or more. His administration also deals with capital gains taxes, which could reduce investor profits.
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“We have put a lot of pressure on wealthy Americans, or at least proposed taxes that would directly affect wealthy Americans,” Pegg said.
If a property tax were approved, it would have no impact on anyone with vacation or real estate in the United States
Taxes on non-resident buyers are also in the pipeline.
In the UK, a 2% stamp duty surcharge will apply to non-resident buyers starting April 2021. The Canadian cities of Vancouver and Toronto already have such a tax, but Prime Minister Justin Trudeau’s government is considering expanding the tax levy at the national level.
When considering real estate purchases, it is important to know not only current tax policy, but also what is on the horizon. These changes are not quick and often take years, so buyers can expect growth in the not too distant future.
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According to Pegg, it’s not just about property tax rates or how much someone expects to pay.
“Taxes vary in different states and sometimes even in different places. How does this property tax treat different types of property? “Asked Mr. Pegg. “For example, if it’s a primary residence and you can argue it’s your primary residence, there might be a cap, but if you buy a condo instead, which is clearly a vacation home or investment property acts, you’ve done this got a very different situation. “
US migration
When the Tax Cuts and Jobs Act of 2017 limited state and local tax deductions to $ 10,000, it sparked a wave of measures from high-tax states like 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 has only compounded that migration, according to Brendan Lynch, a shareholder in Central Florida law firm Lowndes, Drosdick, Doster, Kantor & Reed.
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“It’s like a science experiment,” he said. “They needed a certain catalyst for the people who ended up saying, ‘OK, what else should I look for? ‘And Covid is the catalyst. “
When shoppers are looking for space to spread out from home during work and school, they are also looking for a lower cost of living. Investors just need to consider the difference in their tax bills.
“People always look at this financial structure first, from state income tax or the lack of it for Florida or Texas to local millage rates,” Lynch said. “You can look at the local county’s millage rates – property tax – and see what New Jersey compares to Florida and say, ‘How much will I pay?'”
Financial firms are also looking to save, and several have announced plans to move their headquarters to a more affordable environment.
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New York City-based investment firm Icahn Enterprises announced their move to Sunny Isles Beach in October. Other financial firms such as Blackstone Group and Elliot Management Group will also open offices in Florida. Goldman Sachs is also reportedly considering moving. Software company Oracle recently announced that it is moving from Golden State to Austin, Texas.
These companies will create jobs and upgrade facilities to serve the influx of new residents. Service staff will also look for housing, often in the rental market. Investors looking to enter this market are also poised to do well with the ongoing migration.
“The jobs bring the people,” said Ida Schwartz, a South Florida-based Compass agent. “Now they are really making a migration here for the lifestyle, for closeness to family, for the weather and the jobs.”
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Other considerations
Studying real estate cycles can be helpful in identifying strong investments.
“New York and London both had top prices plummeting for several years,” said Everett-Allen. “There is a sense that if they move through the end of the housing market cycle and price growth could begin, they are buying opportunities now.” to get back into a positive area. “
The trend of people rushing to the suburbs in search of more space and less density this year has added to the worries of the prime housing market in places like New York. That makes it even more of a buyer’s market.
In some areas, prices have skyrocketed for the same reason – families fleeing cities over coronavirus concerns. These markets may be on the other side of the cycle and investors should consider waiting for prices to fall before buying.
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Ms. Everett-Allen also advises investors to watch out for “major regeneration and infrastructure projects.” She mentioned Paris and Los Angeles, both of which are preparing to host the Summer Olympics in 2024 and 2028, respectively.
“Any traffic improvements that will happen in connection with the Games will have an impact on these cities,” she noted. “Paris is pretty interesting because you don’t just have the Grand Paris Project, which is your biggest transportation project for the next decade. There are 68 new stations and four new railway lines; it’s massive. “
Whether it can stay on schedule during the pandemic is unknown, but the project should have a positive impact on the city and those who live and invest there.
Real estate agents also emphasize the importance of fully checking the neighborhood or township in which the property is located. Local ordinances or additional charges to support public projects can affect the use of the property or increase transportation costs.
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For example, the area may have short term rental restrictions. For investors looking to rent out the property as a vacation spot, this makes a difference.
“The biggest thing right now is what’s happening to Airbnb locally,” said Agent Jordan Ayan, who heads North Scottsdale’s luxury real estate team at the Lifestyle Collection, part of Keller Williams Realty, Arizona. “You may come to a state where you think it’s easy to rent something on Airbnb, but you need to know if there’s something in a particular city, neighborhood, or HOA.”
And as for the HOA, investors need to exercise due diligence regarding all of their rules and regulations, not to mention the financial health of the building or the community.
“It’s important for investors to know the state of the state, the state of the place, and the state of the neighborhood,” Ayan said.
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