80/20 Rule Expanded: Co-ops Should Thank Bush
A: Did you know that the recent Mortgage Forgiveness Debt Relief Act of 2007, recently signed into law on December 20th by President Bush, contained an amendment that should make co-op owners rejoice! The 80/20 rule now includes more options for co-ops to qualify and receive market rate commercial rents that otherwise wouldn't have been realized due to tax laws.
80/20 Rule - A federal tax rule that requires residential co-ops to get at least 80 percent of their gross income from their tenant-shareholders and no more than 20 percent from other sources like commercial rents.
According to a release by attorney Aaron Shmulewitz of Belkin, Burden, Wenig, & Goldman, LLP:
On December 20, 2007 President Bush signed into law the Mortgage Forgiveness Debt Relief Act of 2007. The law contained an amendment to §216 of the Internal Revenue Code (the “Code”) that is of immense importance to many co-ops.This new law expands the ability of the corporation to qualify and charge market-rate rents for commercial tenants that otherwise would not have been allowed by tax law. As a result, co-ops that can now qualify should be able to realize significantly more revenue from commercial tenants assuming the raised rents are agreed. Interesting little find here!!In order for a co-op to qualify as a "housing cooperative" (and, thus, enable its shareholders to enjoy the same tax benefits available to home owners (i.e., the $250,000 per person exemption on the gain on sale of a residence, as well as the tax deductibility of interest paid on the shareholder’s apartment loan, interest paid on the co-op’s underlying mortgage, and real estate taxes paid by the co-op), a co-op must satisfy various requirements stated in Code §216.
The most difficult requirement to satisfy has usually been that at least 80% of the co-o’s income for the year must come from its shareholders, and no more than 20% could come from non-shareholder sources. As a result, co-ops whose buildings contained large stores or other commercial spaces were often forced to keep the rent payable by such commercial tenants artificially below-market, or keep the maintenance payable by the co-op’s shareholders artificially high, or impose assessments on the shareholders, so as to preserve the 80/20 income ratio. Some co-ops resorted to even more complicated efforts.
However, the new law radically changes that by adopting two additional alternatives that would also satisfy the “80/20” requirement. Now, a co-op can also qualify if, for the tax year in question:
(i) at least 80% of the total square footage of the co-op’s property is used or available for use by shareholders for residential or residentially-ancillary purposes, or
(ii) at least 90% of the co-op’s expenses are for the acquisition, construction, management, maintenance or care of the co-op’s property for the benefit of its shareholders.
The change became effective immediately, and will benefit co-ops whose tax years end on and after December 31, 2007.
