The Tax Cuts and Jobs Act of 2017 represents the first major restructuring of federal income taxes since 1986, and ushers in serious changes to how co-op, condo and HOA owners will benefit from home ownership. In many cases, the new law will not help these owners due to its focus on eliminating itemized deductions that have historically accrued to and benefited homeowners over renters.
The (Former?) Benefits of Home Ownership
Since the end of World War II and the beginnings of the post-war expansion, federal tax law has been used to guide Americans toward the ‘American Dream’— the opportunity to own a home, grow their equity, and by association provide both a financial cushion for later years and to create generational wealth. Mortgage interest as a deductible item on federal income taxes has been the bedrock of this policy. It provided owners with an opportunity to ‘subsidize’ their tax bill by lowering the amount of income subject to tax. Beside encouraging the purchase of homes throughout the nation’s suburbs, the obvious benefit of tax savings stimulated the trend of purchasing co-op and condo units in urban areas. In short, the policy clearly incentivized renters to become owners.
The federal income tax calculation provides the taxpayer the option of choosing what’s known as a standard deduction, or the opportunity to itemize. Itemizing of deductions on Schedule A provided deductions for such expenses as mortgage interest, state and local taxes, some medical expenses, and charitable deductions, to name a few. The standard deduction until December 31, 2017 was $12,100 for a married couple filing jointly. Single taxpayers were provided a standard deduction of $6,350.
The new tax act increases the standard deduction for single taxpayers to $12,000, and $24,000 for married couples filing jointly. While this may sound like a large increase — for tax-payers in high-tax, high cost-of-living areas like New Jersey, New York, Chicago, and Boston — it is accompanied by a commensurate loss of deductible expenses that previously compensated them for living in a more expensive location.
Changes to Deductible Expenses State and Local Taxes
According to Karen Sackstein, a certified public accountant and principal with The Condo Queens, an accounting firm based in Fair Lawn, New Jersey: “The two major changes in the new tax law that will affect co-op and condo owners are to the mortgage interest deduction and to the deduction for state and local taxes — also known by the acronym SALT. The biggest change for people in the New Jersey area is the deduction limitations for real estate taxes. In the past, for primary residences, the taxpayer was able to deduct 100 percent of their real estate taxes and their state income taxes — and that’s what people did. The average real estate tax deduction in New Jersey last year was $9,500. Under the new law, the maximum deduction for both real estate tax and state and local taxes is $10,000.”