Co-op Mortgage Tax Deduction Limits and Calculation
Member since 2020 · 27 posts · 2 votes
Could someone please explain the mortgage interest limitations in the case of a NYC Co-Op owner?
For example:
Co-op has 100 units and an outstanding underlying mortgage of $20,000,000 ($200,000 per unit allocated). Owner's share of the interest on the underly mortgage paid in 2023 is $5,000
Owner of (shares and lease to) unit A has mortgage against that unit with a current principal of $800,000. Owner has paid $40,000 in interest in 2023.
The owner is limited to $750,000 in deductible interest.
For the purposes of calculating the limited interest deduction, should the total mortgage debt owed be $800,000 (the mortgage on the individual unit) or $1,000,000 (the sum of the mortgages on the individual unit and the owner's share of the underlying mortgage)?
That is, can the owner deduct $37,500 (750000/800000 * 40000) or $33,750 (750000/1000000 * 45000)?
Of course, I could very well be missing important factors or confused about the whole thing.
Thank you!
For the purposes of calculating the limited interest deduction, the total mortgage debt owed would include both the individual mortgage on Unit A and the owner's share of the underlying mortgage.
So, the total mortgage debt owed would be $800,000 (individual mortgage) + $200,000 (owner's share of underlying mortgage) = $1,000,000.
Therefore, the owner would be limited to deducting mortgage interest based on this total mortgage debt of $1,000,000, not just the individual mortgage.
Thus, the deduction for mortgage interest would be calculated as:
($750,000 / $1,000,000) * $40,000 = $30,000
Therefore, in this scenario, the owner would be able to deduct $30,000 of mortgage interest for federal income tax purposes.
For the purposes of calculating the limited interest deduction, the total mortgage debt owed would include both the individual mortgage on Unit A and the owner's share of the underlying mortgage.
So, the total mortgage debt owed would be $800,000 (individual mortgage) + $200,000 (owner's share of underlying mortgage) = $1,000,000.
Therefore, the owner would be limited to deducting mortgage interest based on this total mortgage debt of $1,000,000, not just the individual mortgage.
Thus, the deduction for mortgage interest would be calculated as:
($750,000 / $1,000,000) * $40,000 = $30,000
Therefore, in this scenario, the owner would be able to deduct $30,000 of mortgage interest for federal income tax purposes.
Thank you very much.
Why doesn't the calculation use $45,000 ($40,000 + $5,000)?
($750,000 / $1,000,000) * $45,000 = $33,750
Also, the $800,000 unit/apt mortgage originated before 2017, while the underlying mortgage origination year is 2021. Does that affect the $750,000 cap on interest deduction?
THanks!
Apologies for the oversight. Let's correct the calculation considering the total interest paid on both the individual mortgage and the owner's share of the underlying mortgage:
($750,000 / $1,000,000) * ($40,000 + $5,000) = $33,750
So, you are correct. The deduction for mortgage interest in this case would indeed be $33,750.
Regarding your second question about the origination years of the mortgages, the limitation on mortgage interest deductions generally applies to new loans taken out after December 15, 2017, for both single filers and married couples filing jointly. The individual mortgage on the unit originated before 2017, while the underlying mortgage originated in 2021.
In this case, the origination year of the individual mortgage wouldn't affect the $750,000 cap on interest deduction because it's grandfathered in. However, the underlying mortgage originated after the cutoff date, so it would be subject to the limitation.
Therefore, the $750,000 cap would still apply to the total mortgage debt owed, which includes both the individual mortgage and the owner's share of the underlying mortgage.
Thank you so much for the clarification.
Could you please elaborate on why the $750,000 cap is in effect?
These are two very different and separate loans (completely independent of each other, I think it is safe to say), with entirely different parties and collateral.
The unit owner's mortgage, originated prior to 2017, with a current balance of $800,000, I would think, should be totally exempt from the $750,000 limit.
No idea how to deal with the 2021 originated underlying mortgage loan with the owner's share of the current principal due of $200,000.
Thank you so much for the clarification.
Could you please elaborate on why the $750,000 cap is in effect?
These are two very different and separate loans (completely independent of each other, I think it is safe to say), with entirely different parties and collateral.
The unit owner's mortgage, originated prior to 2017, with a current balance of $800,000, I would think, should be totally exempt from the $750,000 limit.
No idea how to deal with the 2021 originated underlying mortgage loan with the owner's share of the current principal due of $200,000.
Joe -
You're raising a valid point regarding the distinction between the two mortgages and their respective origination dates. Let's clarify the reasons behind the $750,000 cap on mortgage interest deductions and how it applies in this scenario.
Given these points, let's revisit how the $750,000 cap applies in this scenario:
Given this analysis, the owner's deductible interest would include the full interest paid on the individual mortgage and the portion of interest paid on the underlying mortgage that falls within the $750,000 cap.
In summary, while the individual mortgage isn't subject to the $750,000 cap, the portion of interest paid on the underlying mortgage that exceeds the cap wouldn't be deductible.
Joe -
You are correct. Let me clarify:
In this scenario, since the individual mortgage on the unit was originated before 2017 and the owner's share of the underlying co-op mortgage's principal balance allocated to the specific unit is below $750,000, all interest payments made by the owner would indeed be fully deductible.
So, to reiterate, both the interest paid on the individual mortgage and the owner's share of the interest on the underlying co-op mortgage would be fully deductible without any limitation in this case.
Thanks.
Very informative thread - thank you for starting as well as the team members that answered!
Thank you all for your help.
This is a great forum.
I'm sure I'm not the only person in this situation; and equally confident there is plenty of incorrect information and confusion about this out there.
Thank you again!