Key Highlights

  • Many factors for super-prime investors to consider when researching and investing in luxury real estate
  • Look globally and buy locally
  • With economy, tax landscape changing dramatically

Zip codes are one thing, not every thing when looking around for real estate investment locations. Best to use broad definitions of the word “location”…definitions that include long-term infrastructure planning, rental rates, evolving property taxation laws/policies and development.

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Though property tax laws and policies had been fairly stable pre-pandemic, all of that, like so much else, is out the window. According to Kate Everett-Allen, head of international residential research at Knight Frank, “The tax landscape…is already changing quite radically…” due to budget deficits, revenue losses and added costs caused by the COVID pandemic…”and we expect it to (change) even more.”

Real estate investors need to know about any new potential tax levies coming down the pipeline. Several countries are considering wealth taxes as are some states in the US. Taxes on non-resident buyers are also in this proverbial pipeline. In the UK, non-resident buyers will face a stamp duty surcharge of 4% as of April 2021. Vancouver and Toronto already have a stamp duty surcharge on non-resident real estate buyers and Trudeau’s administration is considering expanding that surcharge nationally.

In the US, it’s important for investors to keep in mind that different states have different tax rates. Chris Pegg, senior director of wealth planning for Wells Fargo Private Bank, said, “Taxes vary in different states and even sometimes different localities. How does that property tax treat different kinds of property? 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 (tax) situation.”

Just think about what’s going on with US migration patterns since the Tax Cuts and Jobs Act of 2017 capped state-and-local-tax deductions at $10,000. Many residents and businesses in high-tax states fled and are continuing to flee to Florida, Texas and Nevada since those states, unlike New York, California and Connecticut, have no state income tax. With these transplanted residents come increased and additional amenities to serve these new people and transplanted companies bring jobs plus transplanted and new workers doing those jobs who need housing, both housing to own and housing to rent.

Investors who tap into these new purchase and rental housing demands in low/no tax states have done and will continue to do well from on-going migration trends of both individual and business transplants.

Additionally, Everett-Allen reminds investors that out-bound migration trends away from cities such as London, New York and San Francisco, all experiencing declining prime prices, may “…be buying opportunities now as they come through the end of the property market cycle…” On the other hand, some of these prime city-center buyer’s market locations may be beyond that property cycle and investors would do well to wait for prices to go down before taking the plunge.

Cities such as Paris and Los Angeles, both preparing to host Summer Olympics in 2024 and 2028, respectively, have taken on “big regeneration and infrastructure projects.” Everett-Allen said, “All the transport improvements that will take place around the games will have an impact on those cities.”

Such infrastructure projects will likely benefit those cities, as well as those who live and invest in these cities. A word of caution, however…local ordinances and additional levies to “support” these public projects may come into play and add carrying costs and/or property use when making investments based on vacation and/or short-term rental restrictions.

Too often overlooked “smaller” definitions of location, such as local ordinances, levies, and rental restrictions, come into play in the US, as internationally. Think Home Owners Association Airbnb restrictions. Jordan Ayan, lead agent with North Scottsdale Luxury Real Estate Team with Keller Williams’ Lifestyle Collection in Arizona, said, “It’s critical that investors know the state of the state, the state of the locality and the sate of the neighborhood.”

Thanks to MansionGlobal.

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