Q: Which is a better building, a co-op with high or low tax deductibility?
A: When you say “high or low tax deductibility,” I believe you are referring to the percentage of your monthly co-op maintenance that is tax deductible. There is no single right answer to this question–it varies case-by-case. A co-op’s monthly maintenance payment typically includes your apartment’s share of the operating costs of the building, ground rent (if a lease exists), real estate taxes and the payment for the building’s underlying mortgage. Real estate taxes and the interest on the underlying mortgage are usually the portion of the payment that are tax deductible. Some co-op purchasers may get the impression that the higher the deductibility is, the better it is (aka more affordable because you can write off more on your personal income taxes).
If the tax deductibility of a co-op is unusually high compared to competing co-ops, it could suggest that the real estate taxes are unusually high and/or the corporation is paying a lot of interest on their underlying mortgage because the underlying mortgage is larger than in other buildings. Quite often, a high deductible goes along with a higher maintenance payment. Even though the actual maintenance paid after tax deduction may be similar to the after-tax payment on a building with a lower deductible and lower maintenance payments, it means you need to get a better understanding of the financial condition of the corporation through your trusted advisors.
As appraisers, we often observe higher property values in co-ops with lower maintenance payments and lower deductibles than with higher maintenance payments and higher deductibles, all other things being equal.
The concept of which is better, is both subjective and personal based upon assessment of many factors, including those provided above. Such a decision should be made taking in account a purchaser’s specific needs and financial situation. A qualified real estate agent, in concert with a purchaser’s financial advisor, accountant & legal counsel can help to explain which may be the better option.