Real Estate investors beware! Senate bill number S3060E (the “New York State Small Home Anti-Speculation Act”) is currently pending in the New York State Senate and is likely to pass. A nearly identical bill (A5375A) is also pending in the New York State Assembly.
The proposed “Flip Tax” law will impose an additional 20% tax on properties sold within one (1) year and 15% tax on properties sold after one (1) year—but less than two (2) years—after purchase. While the stated intent of the sponsors of the bill—to deter property speculation and flipping in vulnerable neighborhoods—may be altruistic, the effect on players in the real estate market could be devastating. Indeed, the enactment of this bill is likely to (i) negatively affect lending activity for private lenders, (ii) reduce the recovery of vacant and blighted houses and (iii) shrink city tax revenue as players move their business to areas where such activity remains more profitable.
The bill remains “in committee” at the moment. Once it is approved by the respective committees, the proposed bill will be brought to the floor of each chamber for discussion, at which time the merits and concerns will be discussed. After some possible changes to the bill, votes will be held in each chamber of the New York State government. Upon passage of the bill by the Assembly and the Senate, the approved bill will be presented to Governor Cuomo for signature.
All signs point to passage of the bill.
So what effects could the bill have on the real estate market?
First, investors are likely to move their business to other states where taxes are not a killer of profits. This, of course, could result in negative implications throughout New York State.
Second, there are myriad rundown neighborhoods throughout the State, and especially in and around New York City, that have been ripe for investment and redevelopment. Examples such as Brooklyn Heights, Patchogue, Harlem, where redevelopment led to an influx of monies, lower crime rates and overall improvement will become the exception to the rule.
Third, taxes in New York State are already high. Adding a 15-20% tax on top of what investors already pay will certainly reduce the number of people and companies willing to invest, thus decreasingrevenues for the State, notwithstanding the higher tax rates.
It is therefore likely that passage of this “Flip Tax” bill is likely to harm (i) local communities, as redevelopment will not take place, (ii) the real estate market in New York, as there will be less investors, builders and others willing to work in New York and (iii) the New York State and local governments, who will see a decline in revenues.
Even worse, it is likely that the community this bill is designed to protect—the poor and vulnerable—will also be harmed, as there will be little interest in investing in and improving these underserved areas. Crime rates (which have decreased in redeveloped areas) will stay at dangerous levels, reliance on government services (which have decreased in redeveloped areas) will stay at stressed levels, buildings and infrastructure will continue to deteriorate, and so on.
At this juncture, the best thing to do is contact your local government representatives to express your concerns with the hope that the bill will be defeated. If not, preparing for investments outside New York State and working price increases into your system to alleviate the increased burden of the “Flip Tax” is recommended.
Please don’t hesitate to contact me directly at mjr@romanofirm.com if you have any questions with regard to this proposed legislation or how it might affect you or your business.
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