Will Your Taxes Go Up? Find Out With These 8 Scenarios

With Republicans having inexplicably sacrificed a crucial Senate seat last night by choosing to support a candidate accused of multiple counts of pedophilia, it"s unclear whether tax reform is even a remote possibility at this point.  Certainly, the challenge of forming a consensus among the GOP was difficult enough when they held a 2-seat advantage in the Senate so we can only assume it will be next to impossible now that that lead has been cut in half. 

Of course, Republicans seem to have every intent of passing a tax bill before Doug Jones gets seated in January...but, then again, they"ve missed almost every deadline they"ve set for themselves since Trump moved into the White House nearly a full year ago.

Be that as it may, just in case a bill gets passed at some point before winter break, Bloomberg, along with a little help from Baird Private Wealth Management, has put together a series of 8 tables which help to quantify exactly how you may be impacted by tax reform whether you"re a "millionaire, billionaire, private jet owner" living in Manhattan or an "average Joe" making $40k a year and renting an apartment in Milwaukee.  Here they are:

Scenario 1 - Manhattan Millionaires: These Manhattan residents have a jumbo mortgage (at an assumed 4 percent interest rate) and take a $40,000 deduction on mortgage interest; pay property taxes of $96,250 and state income tax of $135,360; and make annual charitable contributions totaling $100,000.

Unfortunately, contrary to what you might hear from Nancy Pelosi, these folks take a hit under both the House and Senate tax bill primarily due to the loss of the SALT deductions.

Scenario 2 - Malibu Millionaires:  A married couple has a primary residence in Malibu, California, and a second home in Lake Tahoe. The property tax on the Malibu home is $15,860, and $4,896 on their second home; they deduct $40,000 total in mortgage interest for the two homes; and give $50,000 to charity.

Scenario 3 - Small Business Owner:  This married couple with a small manufacturing business in Pittsburgh, Pennsylvania, has $300,000 in pass-through business income. Their deductible mortgage interest adds up to $6,000; their property tax is $8,600; and they give 5 percent of their income to charity.

Scenario 4 - Suburban Family:  A married couple in a New York City suburb has estimated state income tax of $17,290; their annual mortgage interest deduction is $14,000; and they pay property tax of $13,750 -- about the same amount they donate to charity.

Scenario 5 - Single Secretary In Manhattan: This New York City renter pays estimated state income tax of $8,148 and gives about $6,500 to charity.

Scenario 6 - Married Family In Austin:  This young couple rents and has income of $100,000. They give $5,000 a year to charity.

Scenario 7 - Median Income Couple In Portland:  This Portland, Oregon, couple earns close to the median household income for the U.S. Their property tax bill is $1,688; their deductible mortgage interest is $3,000; and estimated state income tax is $4,744.

Scenario 8 - Median Income Family In Milwaukee:  This married couple rents and has an estimated 2017 state income tax bill of $2,104.

Of course, this will all change when/if the GOP submits a final tax bill for consideration...but, like Obamacare, you may only find out how it truly impacts you after it has already been passed.

Hedge Fund Homebuyers In The Hamptons Already Have A Plan To Game Trump"s Mortgage Cap

One of the key changes in the House GOP tax bill was to implement a cap on home interest deductions to the first $500,000 worth of mortgage debt and eliminate  interest deductions from second homes.  Of course, given active opposition from some very powerful realtor and homebuilder lobbying groups, it"s unclear whether the changes will find their way into the final tax bill.  But, at least according to Bloomberg, New York"s "millionaire, billionaire, private jet owning" hedge fund managers aren"t waiting around to find out and are already taking steps to game any potential tax changes.

Out in the Hamptons, Wall Street’s favored beach resort on Long Island, brokers and buyers already have a workaround for a tax-plan provision under consideration in Congress that would take away the mortgage-interest deduction for second homes.

 

A client of Brown Harris Stevens broker Jessica von Hagn who works at a hedge fund decided to turn the vacation home he’s buying into an investment property by setting up a limited liability company. That will allow him to deduct the interest and earn rental income at the height of the season from the modern home on Bridgehampton’s Lumber Lane, with four bedrooms, three baths and a swimming pool on an acre of land.

 

For the buyer: problem solved. For the Hamptons market: more high-end vacation properties getting listed as rentals, more competition and, most likely, falling rents.

 

“If you aren’t able to take advantage of the mortgage deduction for your second home, you’ll see more people putting their homes on the market and the inventory will grow,” von Hagn said. “There’s only a certain number of renters every season and we just keep adding more and more inventory.”

 

Whatever happens with the tax plan, the Bridgehampton buyer isn’t worried. He’s paying more than $2 million for his 3,400-square-foot vacation home, and though he’ll end up spending less time there than he had originally hoped, he figures the rent he’ll earn will more than cover his property taxes and help pay the mortgage.

Of course, it"s not just the Hamptons that would be impacted by the GOP tax bill as brokers in second-home markets across the U.S., from Cape Cod in Massachusetts to Lake Tahoe, California, are bracing for a hit.

A House version of the tax plan, passed by the Ways and Means Committee on Thursday, cuts the mortgage-interest deduction on second homes, and on home-equity loans, which buyers sometimes take out on their primary residence to pay for a vacation property. The Senate’s plan, details of which were released late Thursday, also does away with the home-equity deduction, but preserves the break for second-home mortgages.

That said, realtors, like Tim Bailey in Cape Cod, will undoubtedly call on his powerful lobbying groups to preserve his livelihood which "relies on selling second homes."

Even before any change is passed by Congress, the possibility that the second-home mortgage deduction will be gone is already changing the calculus for some buyers, said Timothy Bailey, a broker with John C. Ricotta & Associates Inc. in the affluent Cape Cod town of Chatham.

 

Bailey said an agent told him that one of her deals, for a $1.5 million vacation property, fell apart over the tax plan.

 

“My whole living relies on selling second homes,” Bailey said. “Because it’s a discretionary purchase, if they lose that deduction, it might be more attractive to rent.”

Of course, as we pointed out recently, this is just more unwelcome news for realtors in a market where buyers favoring lower-priced homes, you know those shacks costing less than $2 million, continued to rise in the third quarter, according to the latest Douglas Elliman Real-Estate Report. This left the high end of the market in a double-bind as supplies of new homes hit the market while sales tapered off...

Purchasers agreed to pay more than the asking price in 10 percent of deals for properties under $3.3 million -- this quarter’s definition of “non-luxury” homes, making up the bottom 90 percent of the market, according to a report Thursday by appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate. It was the biggest share of transactions with bidding wars since the firms began tracking the data in the second quarter of 2016.

 

In their zeal for lower-end deals, buyers snapped up condos as well. Those units -- with a median sale price of $567,500 -- were available for just 97 days on average before going under contract, the fastest clip in six years of record-keeping. On the high-end, buyers showed less interest in acquiring luxury homes than sellers did in listing them. Inventory in that top 10 percent of the market jumped 22 percent, the biggest pile-up in two years.

 

“The market is looking towards those smaller, more manageable homes,” said Carl Benincasa, a regional vice president at Douglas Elliman who oversees sales in the Hamptons. “That’s certainly been a trend we’ve been observing.”

Meanwhile, the real question, at this point, is will this extreme show to aggression towards America"s billionaire class be allowed to stand by the Senate?  What say you?

5 Charts Highlight The Growing Wealth Inequality In America Over The Past 50 Years

Americans across the income spectrum have generally grown wealthier over the past 50 years but those at the top (A.K.A. the "millionaire, billionaire, private jet owners" to use the parlance of our times) have made out much better than the rest of us.  As the Urban Institute pointed out today, in 1963, families in the top 90th percentile of household wealth had roughly six times the wealth of families in the middle. By 2016, that had doubled to 12 times.

Here"s how that evolution of wealth distribution looks graphically:

Of course, part of the problem is annual household income distributions.  As the charts below reveal, the gap between real earnings of the top and bottom 10% of households in the country has nearly doubled over the past 50 years with 90th percentile families today making 13x more than the families at the bottom of the income spectrum, compared to 7x in 1963.

Meanwhile, the Urban Institute figures the growing wealth gap is at least partially attributable to homeownership rates for minorities being persistently stuck ~20 points below those observed among Whites.

Blacks and Hispanics are less likely to own homes, so they more often miss out on this powerful wealth-building tool. Homeownership makes the most of automatic payments—homeowners must make mortgage payments every month—to build equity.

In 1976, 68 percent of white families owned their home, compared with 44 percent of black families and 43 percent of Hispanic families. By 2016, the homeownership gap had narrowed slightly for Hispanics but widened for blacks. Black and Hispanic families were also less likely to own homes than white families with similar incomes.

And while they didn"t cover it, we"re going to go out on a limb and suggest that the growing wealth divide might have something to do with the Fed"s decisions to do this...

...which resulted in this...

Of course, only the people who were already wealthy were able to take advantage of the Fed"s "official" policy decisions designed to inflate one massive asset bubble after another over the past 35 years.

You Know It's Bad When... Prices For Used Jets Are Cratering

America’s wealthiest individuals are thriving thanks to an imbalance in wealth accumulation that favors the already asset-rich. But even though the number of millionaires and billionaires living in the US has been climbing, and is on track to increase by nearly 700,000 a year between now and 2021 – so long as the market avoids another crash – an influx of new potential buyers has done little to alleviate a supply glut that has been weighing on used jet prices for years.

As the Financial Times reports, sales prices for used jets have fallen as much as 35% over the past three years, with the average price falling from $13.7 million in April 2014 to $8.9 million today.

“Prices for second-hand private jets, many of which have barely been flown, have dropped as much as 35 per cent over three years to the end of April. The average price of a pre-owned business jet has fallen from $13.7m in April 2014 to $8.9m, according to research by Colibri Aircraft, which specializes in the marketing, resale and purchase of pre-owned private aircraft.

Owners have lost millions of dollars on the value of their existing business jets as a glut of planes came on to the market in the wake of the economic downturn. The resale price of a Bombardier Global XRS, which sold for $50m, has dropped from $31.3m to $20.4m — down just under 35 per cent, according to Colibri’s figures.”

The collapse of the private-jet bubble isn’t a new phenomenon, though the markdowns that some owners face are probably even larger than what the FT is reporting: Back in 2015, Delta purchased a used Boeing 777 for just $7.7 million, equivalent to a 97.2% discount off its list price of $277.3 million.

Delta CEO Richard Anderson raised some eyebrows in October when he said there was a “huge bubble” in used widebody aircraft, pricing a 10-year-old 777-200 at $10 million.

Anderson said that the market would be “ripe” for Delta to buy used 777s. To be sure, Boeing president and CEO Dennis Muilenburg was among those who pushed back against Anderson, saying the Delta CEO was valuing used 777’s much too low. Turns out, Anderson’s estimate was $2.3 million too high.

To be sure, the supply of new jets has fallen sharply in the past decade. In 2008, 1,313 business jets were delivered, compared with 661 in 2016. But the drop hasn’t been fast enough to balance out oversupply in the used-jet market. One theory is that the glut is being caused in part by wealthy individuals dumping their old jets to buy a new one.

The airlines say they’ve adjusted supplies in response to the market glut, but whatever they’re doing, it’s clearly not working.

Bombardier said it did not comment on specific pricing of its aircraft, but it said the company had realigned its production in the light of market demand.

Newer models coming on to the market had also caused prices to fall further, said Oliver Stone, managing director of Colibri.

“Customers are selling their current jet to upgrade to the new one,” he said. “Supply is increasing, but not demand.”

Yet even with the release of new aircraft, with many manufacturers targeting the larger cabin market, the delivery of new business jets has fallen dramatically over the past decade. In 2008, 1,313 business jets were delivered, compared with just 661 last year.

“Pre-2008, the jet market was in a massive bubble and prices have been decreasing ever since,” said Mr Stone.

Airplane manufacturers helped create the oversupply by embracing a strategy familiar to anyone who’s followed our coverage of US new-car sales data: For years, manufacturers relied on discounts and other incentives to meet delivery goals. Then, when the financial crisis hit, repossessions climbed between 2009 and 2012, according to Edwin Brenninkmeyer, chief executive of Biggin Hill-based Oriens Aviation.

“To keep pace with sales volume, manufacturers increased discounts to continue the high delivery volumes, often with 30 per cent discounts which became the ‘industry norm’.”

If there is a silver lining, it’s that the chartered plane industry stands to benefit as more owners give their planes up for charter. As the FT reports, the rise in available planes hasn’t had much of an impact on the price of a charter hour, which has changed little in the last decade.

“It has been exactly the same price to charter a private jet for the past 10 years,” said Adam Twidell, chief executive of PrivateFly, a global booking service for private aircraft hire.
 

"We're Taking Matters Into Our Own Hands": de Blasio Signs Executive Order Committing NYC To Paris Agreement

The symbolic resistance against Trump"s climate agenda took another step on Friday evening, when New York City Mayor Bill de Blasio signed an executive order reaffirming the city’s commitment to the Paris climate change agreement despite, or rather due to, Trump withdrawing the U.S. from the agreement.

We"re taking matters into our own hands. pic.twitter.com/F3zHYHVBFR

— NYC Mayor"s Office (@NYCMayorsOffice) June 2, 2017

“We here in New York City are shocked at the development this week in Washington, D.C., to see the president of the United States pull out of the Paris accord and literally set this nation, and the whole globe, on the path of denial,” de Blasio said.

De Blasio’s order instructs New York City to adopt the principles of the Paris climate agreement, supporting its key principles of reducing greenhouse gas emissions 80 percent by 2050 and keeping a global temperature increase below 1.5 degrees Celsius. It also directs city agencies to work with the mayor’s Office of Sustainability to create a plan by September 30 to further reduce their own greenhouse gas emissions, and notes that New York City will work with other U.S. cities, states and countries to meet commitments set in the agreement.

I signed Executive Order 26 because New York City"s future is threatened by climate change. We will honor the goals of the #ParisAgreement. pic.twitter.com/ujskQl2q2o

— Bill de Blasio (@NYCMayor) June 2, 2017

“The actions of President Trump have undermined what we’re doing and what cities and states all over the country are doing, and that means we have to go farther,” de Blasio said. “We have to take matters into our own hands.”

In a series of tweets on Wednesday, de Blasio slammed Trump’s decision to withdraw the United States from the agreement, calling it “horribly destructive.”

De Blasio joins Pittsburgh Mayor Bill Peduto, who also signed an executive order this week affirming his city’s compliance with the Paris agreement.

Furthermore, as reported last night, billionaire and former NYC mayor, Michael Bloomberg, announced that he is developing a coalition of U.S. states, cities and business leaders to defy the President"s decision and comply with the terms of the original deal. And yet, considering that Trump won the presidency among other things on the vow to do precisely what he did, and withdraw from the Paris agreement, some have suggested that while global climate trends may a priority for Bloomberg, a man who flies around the world on a fleet of private jets and whose carbon emissions footprint is an "outlier", it is likely safe to say that a majority of Americans, especially those living outside the safe spaces of New York, Los Angeles, San Francisco and Seattle, either disagree, don"t feel the urge to be lectured by hypocrites, or simply don"t care.

Incidentally, here is the NYT on Mike Bloomberg"s carbon footprint:

Meanwhile, speaking of carbon footprints, here is a Elon Musk"s brand new Gulfstream G650 ER private jet, purchased in 2015.

Elon Musk private jet (Photo by Royal King)

Flying Is About To Get Even More Miserable...Well, At Least For Poor People

At a time when you would think the airlines would be a little more image conscious, you know because of that whole beating customers and dragging them off the plane thing that United did, they"re apparently doubling down on efforts to make "Flying The Friendly Skies" the most miserable experience ever.  

After years of finding new ways to charge for "perks" that used to be standard (want to use our aisle to access your seat...that"ll be a $10 fee, please), according to the Wall Street Journal, airlines are getting ready to implement a whole new set of restrictions on their poorest customers.  So, for those of you who have grown accustomed to lavish perks like free overhead bin space, get ready for your new reality.

Battling it out with discount carriers, the world’s biggest airlines are rolling out ultracheap economy-class tickets, or cutting back sharply on basic amenities for their lowest-paying customers. At the same time, they are pulling out the stops to lavish their premium fliers with more perks.

American, United Continental, and Delta all now offer super-low fares, dubbed “basic economy,” that strip out even once-standard allowances, such as carry-on baggage or a choice of seat before boarding.

Those are now extra for these ticket holders, who also generally board last. But the fares are competitive with discount airlines such as Southwest Airlines Co. A United basic economy ticket between Washington and Minneapolis for travel in early May was recently listed as low as $128, $20 less than a regular economy fare. Some of the cheapest fares passengers can get on discount carriers are for seats so basic they don’t recline even an inch.

“When we look at economy, we are looking at a commodity product, without a doubt,” BA Chief Executive Officer Alex Cruz said in November.

But, while while flying in the back of the plane is starting to feel a bit more like a cattle stampede than a pleasurable prelude to a vacation, flying in the front of the plane is about to get even more luxurious, including everything from fully-reclining seats to comforters from Saks Fifth Avenue...because a regular blanket just won"t work for some folks.

But at the front of the plane, the same carriers are showering premium passengers with ever more comfort. Middle East and Asian airlines are among those leading the way, with U.S. carriers trying to catch up. American Airlines has upgraded its business class. Delta last year unveiled plans for business-class suites, effectively small cabins that can be closed off from others, with fully reclining seats. The suites should feature on planes this year.

United on intercontinental routes is introducing an upgraded business class, called United Polaris, to try to keep pace with its nearest rivals. The cabin sports fully reclining seats, bedding by Saks Fifth Avenue and noise-canceling headsets. United is rolling it out on its San Francisco-Hong Kong route. A round-trip ticket for a May flight lists at about $5,000.

British Airways, meanwhile, is spending about $500 million to upgrade its premium classes. BA, which popularized the fully reclining business-class seat in the mid-1990s, is planning a new business-class seat design.

So while the "millionaire, billionaire, private jet owners" are sleeping in first class...

...we wish you main streeters the best of luck maintaining your sanity in "last class."