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INSIGHT: Are Co-op Apartment Deductions Subject to the Recently Enacted ‘SALT Dollar Cap’?

Feb. 7, 2019, 2:04 PM

If you own a cooperative apartment—or advise people who own cooperative apartments—you probably have given some thought to the subject matter of this article, which briefly explores three different approaches that might sustain a negative answer.


In addressing the question, we need focus on only two deduction-granting sections of the federal tax code—Section 164 and Section 216—the relevant portions of which are quoted below.

Section 216(a) begins by saying that a “tenant-stockholder” can deduct “amounts (not otherwise deductible) paid … to a cooperative housing corporation …”

If Section 216(a) stopped there, the shareholder could deduct all the not-otherwise-deductible amounts that he paid to the corporation. But Section 216(a) does not stop there. It goes on to impose a limit. Such payments, it says, are deductible:

“only to the extent that such amounts represent the tenant-stockholder’s proportionate share of:

(1) the real estate taxes allowable as a deduction to the corporation under section 164 [with respect to certain property] or

(2) the interest allowable as a deduction to the corporation under section 163 [with respect to certain indebtedness].”

Subject to certain exceptions, Section 164(a) allows a deduction for certain kinds of “state and local taxes” (sometimes referred to as “SALTs”). One kind of SALT is “State and local … real property taxes” (Section 164(a)(1)).

The 2017 tax act added to Section 164 a new limitation—herein referred to as the “SALT Dollar Cap“—which provides that, as to individual personal-use taxpayers and taxable years beginning before 2026:

“the aggregate amount of taxes taken into account under [Section 164(a)(1) and certain other portions of Section 164] shall not exceed $10,000 ($5,000 in the case of a married individual filing a separate return)” (Section 164(b)(6)(B), added by Pub. L. No. 115-97).

We shall assume that “real estate” within the meaning of Section 216 is the same thing as “real property” within the meaning of Section 164, and shall, except in quotations, use the term “realty” to refer to the same concept. Also, for ease of reference we shall use the term “Section 216(a)(1) deduction” to mean the amount that would be deductible based on Section 216(a)(1) if the SALT Dollar Cap did not exist.


We will deal only with the following very simple set of facts.

John was a “tenant-stockholder” of ABC Corp, which was a “cooperative housing corporation” that owned an apartment house and no other realty. John’s “proportionate share” was 10 percent. John was unmarried, and did not directly pay a tax of any kind.

John used his apartment for personal purposes only, and paid $50,000 to ABC Corp under his proprietary lease, which amount—however denominated in the lease (whether as “maintenance,” “carrying charges,” or something else)—was all rent and did not include any capital contributions. There are no special circumstances in John’s situation that might have to be considered. Such a circumstance might be, for example, that the $50,000 that John paid was less than the amount that his lease called for. (See Treasury Regulation Section 1.216-1(b).)

ABC Corp was entitled to no interest deduction but did properly deduct $180,000 of realty taxes that were billed to it by the city in which its building was located. Thus, except to any extent precluded by the SALT Dollar Cap, John is entitled to an $18,000 deduction.

The Issue

Based on the foregoing, there is no doubt that, of the $50,000 that he paid, John can deduct at least $10,000. The principal question discussed in this article is whether the SALT Dollar Cap prevents him from deducting the other $8,000. (As noted below, there may also be a question as to under which of the two above-cited tax code provisions the $10,000 deduction is taken.)

Discussed below are three approaches under which John might be able to deduct the full $18,000. Each discussion is in the form of an argument that John’s lawyer might make, each of the latter two being based on the assumption that the previous argument or arguments had failed.

Approach 1

No one doubts that, subject to any applicable limits and provided that they are not otherwise deductible, Section 216(a)(1) allows John to deduct the “amounts” that he paid to ABC Corp. It must be emphasized that those amounts were paid to ABC Corp, and not to the city. They were paid as rent, not as realty taxes. Thus, they are not to be “taken into account under” Section 164(a)(1), and the SALT Dollar Cap is therefore by its terms inapplicable. That John’s landlord might have used all or part of the $50,000 to pay its realty taxes (if, indeed, it did pay them rather than merely accruing the liability) is simply irrelevant.

Even if John had paid the $18,000 to the city (receiving a credit against his rent), his payment would still not be a payment of taxes for purposes of Section 164. The regulations are quite specific on the point: “Taxes paid by a tenant … for a landlord … are … rent …, the amount of the tax being deductible by the latter.” (Treas. Reg. Section 1.162-11(a). To the same effect is Treas. Reg. Section 1.216-1(h) Ex. (4). See also Treas. Reg. Section 1.61-8(c), which deals generally with expenses of a landlord paid by its tenant.)

Moreover, the Code itself recognizes that a Section 216(a)(1) deduction is not for taxes. For example, Section 67(b) lists as separate items (1) “the deduction under section 164 (relating to taxes)” and (2) “the deduction under section 216 (relating to deductions in connection with cooperative housing corporations).” To the same effect is Section 911(c)(3)(A)(ii), which lists as separate items (1) “taxes of the kind deductible under section … 164,” and (2) “amounts allowable as a deduction under section 216(a).” The regulations do likewise. (See Treas. Reg. Sections 1.67-1T and 1.262-1(c).)

It is true that the U.S. Court of Appeals for the Second Circuit has twice referred to a Section 216(a)(1) deduction as being for “taxes.” In the earlier case, the court stated that Section 216 “permits shareholders to deduct … real estate taxes … by virtue of the fact that the shares convey the right to occupy a ’dwelling.’” However, aside from being a non sequitur, that statement was a pure dictum, inasmuch as there was no Section 216(a) issue before the court. In the latter case, the court, relying in part on the earlier dictum, stated as follows: “Thus the precise question is whether a section 216 deduction is a deduction for ‘taxes described in … section 164(a).’ *** [S]ection 216(a)(1) provides a deduction for tenant-stockholders’ share of real estate taxes, which are ‘taxes described in’ section 164(a).” But that statement was again dictum, inasmuch as the court was operating under the (erroneous) belief that, despite their strong assertions to the contrary, the taxpayers had effectively conceded that their payments were “taxes” and were fighting the Internal Revenue Service on some other ground. Such dicta are not controlling.

To summarize, because a Section 216(a)(1) deduction is for rent rather than for taxes, Section 164 is inapplicable. It follows that the SALT Dollar Cap is wholly irrelevant, and John is entitled to deduct the full $18,000.

Approach 2

Even if the above argument is rejected and a Section 216(a)(1) deduction is deemed to be a deduction of “taxes,” it is not automatically the case that such a “taxes” deduction is subject to the SALT Dollar Cap.

According to the U.S. Tax Court in a decision affirmed by the Second Circuit, “a tax deductible under section 216 is not deductible under section 164.” If that is the case, then, by the very terms of the SALT Dollar Cap, no part of John’s $18,000 deduction is subject to reduction thereunder, inasmuch as Section 164(b)(6) applies only to “taxes taken into account under [certain portions of Section 164],” which obviously does not include Section 216.

Considerable support for that conclusion may be found in the so-called “Bluebook” issued by the staff of the Joint Committee on Taxation. Evidently the staff was concerned that the courts might both (1) act on the basis that a deduction based on Section 216(a)(1) is the deduction of a tax but nevertheless taken under Section 216 rather than under Section 164, and (2) feel compelled to apply the SALT Dollar Cap as written—i.e., only to deductions taken under the listed portions of Section 164. The staff tried to reduce that likelihood by asserting (without the citation of any authority, it may be noted) that Congress “intended that the limitation apply to the deduction for amounts paid or accrued to a cooperative housing corporation by a tenant-stockholder under section 216(a)(1) (relating to real estate taxes) in the same manner as the limitation applies to real estate taxes under section 164.” (Joint Committee on Taxation, General Explanation of Public Law 115-97, JCS-1-18 (Dec. 20, 2018), p. 68.) Significantly, the staff acknowledged that “A technical correction may be required to achieve this result.”

In point of fact, a draft correction bill released on the last day of the 115th Congress did contain a provision intended to deal with this point. The proposal was essentially to broaden the scope of the SALT Dollar Cap by making it apply, not only to realty tax deductions taken under Section164, but instead to realty tax deductions taken under any tax code section, including, of course, Section 216. More precisely, the amendment would replace the words “taxes taken into account under [the listed Section 164 provisions]” with the words “the deduction allowed to a taxpayer under this chapter [i.e., the entire income tax law] on account of taxes described in [the listed Section 164 provisions].” According to the Joint Committee staff, the purpose of the proposed amendment was to “clarif[y] that the aggregate amount of the deductions allowed to a taxpayer … under chapter 1 (not solely under section 164) on account of taxes described in [Section 164(a)(1) and certain other portions of Section 164] may not exceed $10,000 ($5,000 in the case of a married individual filing a separate return.” Lest there be any doubt about the target of the change, the staff report added the following: “Thus, for example, the deduction under section 216(a)(1) is [sic] subject to limitation.”

As of this writing, no such “correction” has been adopted. Accordingly, even proceeding on the assumption that the $18,000 that John paid was a tax, it has been determined that a tax of that kind is deductible only under Section 216, so that the SALT Dollar Cap does not come into play.

Approach 3

It is here assumed that two things have been settled against John. The first is that, despite having been paid as rent, an amount deducted under Section 216(a)(1) is nevertheless a tax. The second is that, despite not being allowable under Section 164(a)(1), such a tax is nevertheless “taken into account under” that provision. Based on those assumptions, the SALT Dollar Cap clearly applies in John’s case and limits his deduction under Section164(a)(1) to $10,000. It does not necessarily follow, though, that John cannot deduct the full $18,000. There might be another provision that allows the other $8,000. And there is such a provision, namely Section 216(a)(1).

The analysis is this. If one accepts that the SALT Dollar Cap does limit John’s deduction under Section164(a)(1) to $10,000, it follows that John’s $18,000 payment—which would be fully deductible under Section 164 were it not for the SALT Dollar Cap—must be regarded as consisting of a $10,000 part and an $8,000 part, as follows. Because it is deductible under Section 164, the $10,000 part is, from a Section 216 perspective, “otherwise deductible,” whereas, because there is no provision (other than Section 216 itself) that allows its deduction, the $8,000 part is, again from a Section 216 perspective, “not otherwise deductible.” And Section 216(a)(1) allows the deduction of described realty tax amounts that are “not otherwise deductible.”

Nor can it be maintained that such a result was unintended. A comparable situation exists with respect to charitable gifts by a business. Again, two tax code sections are involved. One is Section 162(a), which in general allows a deduction for expenses incurred in the operation of a business. The other is Section 170, which in general allows a deduction for charitable donations. Like IRC Section 216(a)(1), Section 162(a) has no dollar cap. Like Section 164 at this point in time, Section 170 does have a dollar cap. The question then presents itself: If a payment satisfies the requirements of Section 170 but exceeds its dollar cap, can the excess be deducted under Section 162(a) (assuming, of course, that it meets Section 162(a)’s requirements)? Congress decided that the answer should be no, and Section 162(b) so provides:

“No deduction shall be allowed under subsection (a) for any contribution or gift which would be allowable as a deduction under section 170 were it not for the dollar limitations … set forth in such section.”

The regulations repeat the rule using very much the same language, and add the following:

“For example, if a taxpayer makes a contribution of $5,000 and only $4,000 of this amount is deductible under section 170(a) …, no deduction is allowable under section 162(a) for the remaining $1,000” (Treas. Reg. Section 1.162-15(a)).

Had Congress meant that amounts such as John’s $8,000 should not be deductible under Section 216, it would not only have omitted the “not otherwise deductible” language but, being aware of Section 162(b), would also have added to Section 216 a provision reading something like this:

“No deduction shall be allowed under subsection (a) for any taxes which would be allowable as a deduction under section 164 were it not for the dollar limitations … set forth in such section.”

It will be noted that, except for the substitution of the word “taxes” for the words “ contribution or gift” and the substitution of “section 164” for “section 170,” this is word-for-word the same as the above-quoted Section 162(b).

That Congress chose not to add such a provision, also shows that Section 216(a)(1) deductions were meant to remain unimpaired by the 2017 legislation.

Before we leave this point we should note the reason that we stipulated that John had paid no other tax of a kind deductible under Section 164(a). That provision covers other kinds of taxes as well as realty taxes. Had John also paid such other kind of tax—say, income tax of more than $10,000—one would have to determine how much of each of the two potential tax deductions was being disallowed. If, for example, the allowance of $10,000 were to be deemed to be all in respect of the income tax that John paid, then the SALT Dollar Cap would be disallowing all $18,000 of John’s Section 216(a)(1) deduction. Under other possible rules—say, proportional disallowance—the amount of John’s $18,000 payment disallowed by the SALT Dollar Cap would be, depending upon how much of his potential deduction for income taxes was being disallowed, somewhere between $8,000 and $18,000. It would make a difference for John because any disallowed portion of his potential deduction for income taxes could not be saved by Section 216.


Under any of the three approaches, the answer to our question is no, and John can deduct all $18,000.

It is of course recognized that, if he can, the owner of a cooperative apartment is in that respect in a better position than a taxpayer who owns and resides in a condominium unit or any other form of home ownership and pays $18,000 of realty taxes thereon but can deduct only $10,000. That being so and rather large sums being involved, it is not unlikely that (1) despite there being no place on Form 1040 for it to be done, apartment owners will claim full Section 216(a)(1) deductions, (2) the IRS will oppose such claims, and (3) the matter will reach the courts. Stay tuned.

Mr. Miller is a member of the law firm Miller & Miller LLP, which has offices in New York City and on Long Island. He and his partner Martin B. Miller, Esq. are the authors of 596 T.M., Cooperative and Condominium Apartments.

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