The Tax Cuts and Jobs Act of 2017 — affordable homeownership is still in reach in New York City



April 03, 2018

Affordable Housing Alert

Author(s): Erica F. Buckley

The Tax Cuts and Jobs Act is seen by many as a disincentive to the for-sale market in high tax housing markets such as New York City, with fear that the American Dream of homeownership will no longer be in reach. However, a closer look reveals that in New York City there are tax incentives and financing tools that serve to offset the negative consequences. This client alert provides an overview of the relevant changes under the Tax Cuts and Jobs Act for homeowners, tax benefits under the Affordable Housing New York Program (aka 421-a) and financing for homeownership under the City’s Open Door Program to support the conclusion that affordable homeownership is still possible in New York City.

The Tax Cuts and Jobs Act — What is left for homeowners?

The biggest change to homeowners under the Tax Cuts and Jobs Act is the reduction of the mortgage interest and property tax deductions—the amount of interest and property taxes paid by a homeowner that can be deducted on a filers federal and local taxes. Below is a summary of those provisions:

Mortgage interest deduction

  • The new law reduces the limit on deductible mortgage debt for new loans consummated after December 14, 2017, that are below $750,000. Existing loans up to $1 million are grandfathered. These caps are not subject to increase for inflation.
  • Existing homeowners with consummated loans prior to December 14, 2017, may refinance at an amount up to $1 million and still deduct mortgage interest.
  • Interest on home equity loans is deductible only if the proceeds are used to substantially improve the home.
  • Interest is still deductible on second homes and is subject to the $750,000/$1 million caps discussed above.

State and Local Tax deductions (SALT)

  • The new law allows for an itemized deduction of up to $10,000 for the total of state and local property taxes and income and sales taxes. This $10,000 limit applies to single and married filers and does not increase for inflation.

Repeal of personal exemptions

  • The new law has repealed personal exemptions in entirety. Under the prior law, tax filers could deduct $4,150 in 2018 for the filer and his or her spouse, if any, and for each dependent.

Affordable Housing New York Program for homeownership (aka 421-a tax exemption)

Although the Affordable Housing New York Program is heavily focused on mixed-income rental properties, there are still options available for condominium and cooperative developers seeking to build homeownership projects outside of Manhattan. Under the new iteration of 421-a, certain homeownership projects are eligible for a 100% real estate tax exemption for up to three years during construction, with an additional 20-year exemption thereafter. For the first 14 years, projects are eligible for a 100% exemption. Thereafter, projects are eligible for a 25% exemption for the remaining six years, subject to an assessed valuation cap of $65,000 per unit.

Homeownership project eligibility criteria

  • Projects must be located within the four boroughs outside Manhattan, including Brooklyn, Bronx, Queens and Staten Island;
  • Homeownership segments or projects shall not contain more than 35 residential dwelling units;
  • Condominium and cooperative homeowners must agree to use their home as their primary residence for at least five years after the date of purchase; and
  • Upon the first tax assessment following construction completion, the condominium or cooperative project must have an average assessed value that does not exceed $65,000 per dwelling unit.

For more information on 421-a, Nixon Peabody’s Developer’s Guide to 421-a is available here.

Open Door — a new financing tool for affordable homeownership

Open Door is a new financing tool provided by the New York City Department of Housing Preservation and Development for the construction of new condominium or cooperative projects for moderate- and middle-income households. Homeowners must agree to occupy their homes as their primary residence and adhere to price caps on resale. Open Door is available to not-for-profit developers and for-profit developers. Key aspects of the financing are:

  • Per unit subsidies range from $165,000 to $190,000 per dwelling unit, with income targets ranging from 80% to 130% of the area median income, depending upon the nature of the site and market factors;
  • Open Door subsidy may be combined with other private and government subsidies, including but not limited to grants from the New York State Affordable Housing Corporation (AHC) program and developer equity;
  • Loans are for a minimum term of 20 years, and otherwise match the term of tax exemption (e.g., 20-year 421-a tax exemption would match 20-year loan term);
  • Underwriting for sales prices will cap housing costs at 33% of annual income for a homeowner, taking into consideration maintenance or common charges, taxes and projected mortgage payments (assuming a 30-year mortgage term with a 5% down payment and a fixed interest rate calibrated to current rates).

More information on the Open Door program is available here.

What does this mean for a new homeowner in New York City under these programs?

Under a typical scenario, a first time homebuyer would likely buy their new home, whether it be a cooperative or a condominium, at a purchase price of around $200,000 to $400,000—a price well within the $65,000 assessed value cap for 421-a. Assuming the project qualified for 421-a, there would be no real property taxes for the first 14 years, therefore posing no issues with the $10,000 cap under SALT, and the homeowner would likely have the ability to deduct mortgage interest. Assuming the homeowner purchased their home for $200,000, putting down 5% and borrowing the rest over a 30-year term with a fixed interest rate of 5%, mortgage interest would be around $9,436.34 a year—within the full amount deductible under the law, given the size of the loan. Therefore, the benefits of homeownership remain intact under this scenario.

Conclusion

While the attack on homeownership under the Tax Cuts and Jobs Act cannot be ignored, it should not be used as a justification to halt further development of affordable homeownership. There are still many inherent benefits to homeownership that cannot be quantified—the sense of pride that comes with owning a home and the ability to establish roots in a community, which is especially important to children who benefit from such stability. While many argue that a rent-regulated lease does the same thing, many homeowners will adamantly disagree.

Developers wishing to explore the creation of affordable cooperatives and condominiums should contact the author for more information.

Nixon Peabody LLP is a full-service law firm with a dedicated Cooperative and Condominium team, which represents both for-profit and nonprofit developers of affordable, middle-market and select luxury for-sale projects.

For more information, please see our Cooperatives and Condominiums practice brochure, available here.

The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.

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