So why might living in a co-op give taxpayers a way around the SALT cap? In short, co-op owners don’t pay a property tax, or actually buy a property as it’s usually understood, as Pro Tax’s Brian Faler reported. That matters because lawmakers bypassed the section of the tax code that does allow co-op owners to deduct their version of property taxes — essentially a fee paid to the corporation that owns the property, which then pays the taxes — when drafting the TCJA.
The article does caution it’s “not apparent whether co-op owners can assume they’re in the clear, at least for now, on property taxes.” But what exactly is the issue?
To discover that, you must look at the tax law, specifically IRC §§216 and 164 and this thing called a housing cooperative (or co-op). Housing cooperatives are a form of ownership in residential units, often consisting of apartments in a single building. Their closest equivalent is a condominium development, but in the housing cooperative a corporation actually owns the building and residents own shares of stock in the corporation.
That share of stock gives the owner the right to occupy a specific unit, as well as access to the common areas. By contrast, condominium units are owned outright by the individual owner, and normally only the common areas are jointly owned and managed by the homeowner’s association.
Recognizing that a co-op owner is similarly situated to the owner of a condominium unit, the IRC provides special rules that allow the co-op owner a deduction for taxes and interest even though he/she doesn’t directly own residential property. These special rules are found at IRC §216.
Of specific interest in this issue is the grant of a deduction for amounts paid by the co-op as property taxes. IRC §216(a)(1) provides:
(a) Allowance of deduction In the case of a tenant-stockholder (as defined in subsection (b)(2)), there shall be allowed as a deduction amounts (not otherwise deductible) paid or accrued to a cooperative housing corporation within the taxable year, but 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 which are paid or incurred by the corporation on the houses or apartment building and on the land on which such houses (or building) are situated,
The potential problem arises based on how Congress limited to $10,000 an individual’s deduction for income, sales and property taxes on personal property. IRC §164(b)(B) provides:
…the aggregate amount of taxes taken into account under paragraphs (1), (2), and (3) of subsection (a) and paragraph (5) of this subsection for any taxable year shall not exceed $10,000 ($5,000 in the case of a married individual filing a separate return).
All of those references are internal to IRC §164 and the restriction is limited to individuals. However, this tax is taken into account under IRC §216 based on amounts paid by the corporation that are deductible to it under §164—and thus appears to not be subject to the $10,000 limit at the individual level by the wording of the provision.
The Joint Committee on Taxation, in their General Explanation of Public Law 115-97 (the Blue Book) state that the intent of the law was to subject such payments to the $10,000 limit.
It is 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.
However, a footnote to the above sentence indicates that while it may have been their intent, the law itself does not appear to accomplish that result:
A technical correction may be needed to achieve this result.
There is the possibility Treasury will decide that they can argue the language does accomplish that intent. It's less of a stretch than would have been required for the 15-year property retail glitch to have been fixed administratively (which Treasury decided they could not do), but it still appears to be a bit of a stretch due to the very specific cross-referencing in the limitation language. An attempt to achieve the intended result via an IRS administrative pronouncement or regulation could very well be challenged as being contrary to the unambiguous language of the statute.
If Treasury decides the agency can’t fix the problem on its own, then Congress would have to pass a technical correction to achieve the desired result. But the cap on state and local taxes is politically controversial, and it may not be simple to get the language changed to reflect this intent through either the House or Senate at this point.
Advisers whose clients are thinking of taking this position on a return should disclose the position on Form 8275. The adviser should warn that client that while the position appears to meet the “reasonable basis” standard for taking the position on the return with adequate disclosure, the return will stand out with a large deduction on line 6, Schedule A (taxes not limited by $10,000 limit). As well, the IRS may try to shut this deduction down administratively and Congress may retroactively change this via a technical correction. But right now the law as written likely falls short of the author’s intent to limit such deductions.
 Bernie Becker, “ Plugging opportunity,” Politico Morning Tax, https://www.politico.com/newsletters/morning-tax/2019/02/21/plugging-opportunity-397663, February 21, 2019
 Joint Committee on Taxation, General Explanation of Public Law 115-97, JCS-1-18, 2018, p. 68
 Joint Committee on Taxation, General Explanation of Public Law 115-97, JCS-1-18, 2018, Footnote 294, p. 68