Wednesday, January 9, 2008
"I am extremely pleased that the tax code will treat people who live in co-operative housing the same way as homeowners and condo owners are treated when it comes to their renting out part of their property"
The Mortgage Forgiveness Debt Relief Act of 2007 passed in December, contains a provision pushed through by House Ways and Means Chairperson Charles Rangle, which specifically affects co-operative housing by changing the criteria to qualify for co-op status known as the "80/20 rule". The rule meant that co-operative buildings were required to get 80% of their income from tenant-shareholders, and could not show revenue of more than 20% from other sources, like collecting commercial rents on retail or office space in the same building. That's now changed. Broadening the rules may help the Boards of cooperative buildings have greater confidence about compliance, and simplify everyones lives. It is unlikely however, to create any real windfall in commercial income for the co-ops in most cases. Under the new law almost all NYC co-ops look like they will qualify under one of these new criteria:
what do the changes mean for shareholders?
If the building did not meet the old 80/20 threshold, the shareholders were in danger of loosing their tax benefits. Real estate attorney Michael Dym explains, "Shareholders lose the ability to deduct the interest portion of their mortgage payment and a portion of maintenance attributable to paying the underlying mortgage and real estate taxes on the co-op's building. In short, assuming the co-op ran afoul of 80/20, under the old rules, they would loose the principal tax benefits of homeownership." It was similar to the way other corporations work where the tax benefits of owned real estate, cannot be passed along to shareholders. This however, differs greatly from a how rental income is utilized by an owner of mixed-use real property, where collecting market rent from a retail store or medical office, can greatly offset the costs of operation and ownership of the property. The new, broadened, criteria for co-ops, will make it easier for co-ops to collect market rents and still permit the pass-through of those tax benefits to shareholders, who's buildings might have been in violation under the old law.