$10,000 property tax deduction cap impact on house hacking

New York City, NY · Member since 2015 · 38 posts · 14 votes

Hi!

Just have a very quick question regarding the newly proposed $10,000 property & state income tax deduction cap.

How would it affect the property tax deduction for house hacking (buying a multifamily and living in one unit while renting out the others) for someone who decides to opt for the $10,000 state & local income tax deduction instead?

Was originally planning on house hacking in NJ but possibly having second thoughts depending on the impact of the new bill.

Thanks for your input!

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Logan AllecBusiness Member

Accountant · Los Angeles, CA · Member since 2014 · 1k+ posts · 980 votes

You would prorate your property expenses between the portion you occupy and the portion your tenants occupy, and only property taxes on the portion of the property that you occupy would be subject to the new limitation.

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Logan AllecBusiness Member
Accountant · Los Angeles, CA · Member since 2014 · 1k+ posts · 980 votes
8y
You would prorate your property expenses between the portion you occupy and the portion your tenants occupy, and only property taxes on the portion of the property that you occupy would be subject to the new limitation.
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Account Closed
OP
New York City, NY · Member since 2015 · 38 posts · 14 votes
8y
Great, thanks @Logan Allec!
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Dave Toelkes
Investor · Pawleys Island, SC · Member since 2008 · 1k+ posts · 837 votes
8y
@Account Closed
Just to be clear. The $10000 property tax and sales tax deduciton is for those who itemize deductions on Schedule A. The tax retorm proposal will limit the amount of the deduction for property tax and state/local sales taxes combined to $10000, whereas it was unlimited previously. Property taxes for your rental property are claimed on Schedule E and are not affected by this provision of the tax reform package
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Logan AllecBusiness Member
Accountant · Los Angeles, CA · Member since 2014 · 1k+ posts · 980 votes
8y
@Account Closed is correct, and to come full circle:

Property taxes on the portion of the property that you occupy are reported on Schedule A and are subject to the new limitation.

Property taxes on the portion of the property that your tenants occupy are reported on Schedule E and are not subject to the new limitation.

I househacked a 4-unit and rented out half of the unit I occupied. So I reported 1/8 of my property taxes on Schedule A and 7/8 on Schedule E. There are other reasonable methods of prorating, such as square footage.
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Sunny Burns
Rental Property Investor · Mine Hill, NJ · Member since 2014 · 229 posts · 396 votes
8y
Thanks @Logan Allec for the clarification. Definetly makes me feel a lot better about this.
So just to confirm, I want to share my situation. We househack a 4-fam. That costs $12,000 in taxes. We also have a 3 fam with $14,000 in taxes.
So I would put $3,000 deduction on my schedule A for my personal portion of the quadplex.
Then the remaining $9,000 + $14,000 = $23,000 in schedule E.
And since the $10k cap on tax deduction is only limited to schedule A, personal property tax deductions. I will not be losing out on any deduction, correct?
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Account Closed
OP
New York City, NY · Member since 2015 · 38 posts · 14 votes
8y
Thanks Dave, Logan, and Sunny!
This clears things up a lot.
Sunny, I believe your state income tax deductions would count towards the $10000 SALT deduction limit as well, so if you deduct $3000 from your personal residence property tax, you'd only be able to deduct up to $7000 more from your state income taxes based on the new tax rules that comes into effect.
P.S. Sunny, I listened to your podcast #210. Very inspiring, I hope to do something similar in the near future, once prices stabilizes a bit in the NJ area.
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Logan AllecBusiness Member
Accountant · Los Angeles, CA · Member since 2014 · 1k+ posts · 980 votes
8y
@Sunny Burns, yes, your math is correct.
However, there may be other reasonable ways of allocating your property tax deductions among the units that may result in you being able to shift more property taxes to Schedule E, which I imagine you'd want to do given @Account Closed 's point that the $10,000 cap is on your combined personal state, local, and property taxes reported on Schedule A.
Not sure what your tax situation is, but it's possible that on your 2018 tax return you may not get any benefit from property taxes allocated to your personal residence since the standard deduction for married filing jointly is is $24,000 in 2018.
Check with your tax advisor.
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Kevin Phu
Rental Property Investor · San Diego, CA · Member since 2016 · 507 posts · 171 votes
8y
Originally posted by @Logan Allec:

@Account Closed is correct, and to come full circle:

Property taxes on the portion of the property that you occupy are reported on Schedule A and are subject to the new limitation.

Property taxes on the portion of the property that your tenants occupy are reported on Schedule E and are not subject to the new limitation.

I househacked a 4-unit and rented out half of the unit I occupied. So I reported 1/8 of my property taxes on Schedule A and 7/8 on Schedule E. There are other reasonable methods of prorating, such as square footage.
How did you come to the 1/8 calculation? If you rent out 3 full units and half of another wouldn't that make it 1/5 personal occupancy?
Did you calculate by total rooms in the units or just by bedrooms?
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Logan AllecBusiness Member
Accountant · Los Angeles, CA · Member since 2014 · 1k+ posts · 980 votes
8y
@Kevin Phu
How did you come to the 1/8 calculation?
Let's say each unit is 2,000 square feet, so the entire property is 8,000 square feet (in reality my property is way smaller but just for sake of example). So we have:
Unit 1: 2,000 square feet rented out
Unit 2: 2,000 square feet rented out
Unit 3: 2,000 square feet rented out
Unit 4: 1,000 square feet rented out; 1,000 square feet occupied by me
So 7,000 out of 8,000 square feet is rented out = 7/8.
And 1,000 out of 8,000 square feet is occupied by me = 1/8.
Did you calculate by total rooms in the units or just by bedrooms?
I personally used square footage, but that's not the way it has to be. You can come up with any allocation you want, as long as it's "reasonable" (vague, I know).
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Kevin Phu
Rental Property Investor · San Diego, CA · Member since 2016 · 507 posts · 171 votes
8y
Originally posted by @Logan Allec:

@Kevin Phu
How did you come to the 1/8 calculation?
Let's say each unit is 2,000 square feet, so the entire property is 8,000 square feet (in reality my property is way smaller but just for sake of example). So we have:
Unit 1: 2,000 square feet rented out
Unit 2: 2,000 square feet rented out
Unit 3: 2,000 square feet rented out
Unit 4: 1,000 square feet rented out; 1,000 square feet occupied by me
So 7,000 out of 8,000 square feet is rented out = 7/8.
And 1,000 out of 8,000 square feet is occupied by me = 1/8.
Did you calculate by total rooms in the units or just by bedrooms?
I personally used square footage, but that's not the way it has to be. You can come up with any allocation you want, as long as it's "reasonable" (vague, I know).
Gotcha! That makes more sense now. Thanks for the explanation.
How would I divide the sqft up for a SFR? sqft of the rented bedroom/sq ft of rest of house minus personal bedroom? sqft of rented bedroom plus common areas/sq ft of entire house?
So many ways to calculate it... *sigh* I recently filed it 50/50 since I had 2 rooms of the 4 rented out in 2017.
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Logan AllecBusiness Member
Accountant · Los Angeles, CA · Member since 2014 · 1k+ posts · 980 votes
8y
@Kevin Phu, the typical method is by square footage where you take (Square Footage of Rented Space + Pro Rata Share of Common Space) / Total Space in House.
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