When Congressman Rangel's H.R. 3648 was signed into law on December 20, 2007, many housing cooperatives were relieved of constraints that had been costly to them both in stress to the board and its professionals and in financial terms as well. HR. 3648 modifies Section 216 of the Internal Revenue Code to allow alternative ways of meeting the '80/20' test.

Home Owner Deductions
Our tax law permits home owners to deduct from their federal taxable income amounts that they pay for property taxes and mortgage interest. Decades ago, in acknowledgment of the home owner status of shareholders who make their homes in housing cooperatives, a predecessor to Section 216 was enacted. It sets several requirements for tenant-stockholders (cooperators or shareholders) to qualify to take these deduction for their share of the property taxes and mortgage interest paid or incurred by the cooperative. Prior to the passage of H.R. 3648, one of these requirements was that the cooperative had to derive at least 80% of gross income from its tenant shareholders. Many cooperatives with commercial space had found themselves obliged to charge less than market rent for this space in order to preserve shareholder rights to tax deductions. Proceeds of an insurance settlement, or exceptional investment success could also threaten the 80/20 qualification, so cooperatives had to be ever vigilant to ensure that they did not fall over this 'cliff.'

Strong Advocacy Effort
Working through the National Association of Housing Cooperatives (NAHC), the national voice of housing cooperatives, CNYC had discussed this matter with Congressman Rangel and his staff experts for many years. Senator Chuck Schumer was involved, too, ever since his days in the Congress. Last fall, Mr. Rangel included in the Mortgage Forgiveness Debt Relief Act of 2007 (HR 3648) a measure that enhance the flexibility of cooperatives to manage their buildings without the fear of disqualifying owners from deducting their proportionate share of the building's mortgage interest and property taxes. Mr. Schumer ensured that this measure was included in the Senate bill.

Mr. Rangel was happy to see that Congress could come together to resolve such a longstanding issue: "I am extremely pleased that the tax code will treat people who live in cooperative housing the same way as home owners and condominium owners are treated when it comes to their renting out part of their property," said Mr. Rangel, Chairman of the House Ways and Means Committee. "I hope that this will provide relief from for some from the high housing costs in New York."

Three Alternative Ways to Qualify
Under the new law, cooperatives have alternatives to the 80/20 financial test. They can now pass through applicable tax benefits
IF
80% or more of the corporation's gross income for such taxable year is derived from tenant-stockholders.
OR
at all times during such taxable year, 80% or more of the total square footage of the corporation's property is used or available for use by the tenant-stockholders for residential purposes or purposes ancillary to such residential use.
OR
90% or more of the expenditures of the corporation paid or incurred during such taxable year are paid or incurred for the acquisition, construction, management, maintenance, or care of the corporation's property for the benefit of the tenant-stockholders.

This liberalization of the 80/20 rule will enable cooperatives to maximize the value of the space in their building. While this is not particularly good news for commercial tenants that heretofore benefited from lower than market rents, it does have the potential to enhance the viability of housing cooperatives. There will be no loss- and possibly some gain- to government entities, as the cooperatives will be taxed on their profits.

Tax Applications
The Internal Revenue Service has developed Form 1120-C to collect information about member ('patronage') and non-member ('non-patronage') income of cooperatives. This form is to be used for the fiscal year 2007 and questions have been raised by accounting professionals regarding certain of the classifications it requests. Tax attorney Joel E. Miller has written a guest article , which you will find on pages 12 and 13, offering his professional opinion.

Sincerest Thanks
Passage of H.R. 3648 is the culmination of 32 years of effort by housing cooperatives to eliminate the 'cliff' at 80/20. Please follow the lead of CNYC in thanking our legislators for their hard work on our behalf (see page 2). You can write to Congressman Rangel in his local office at 163 West 125 Street, Suite 737, NYC 10027 or in Congress at 2354 Rayburn House Office Building, Washington, DC 20515 and to Senator Schumer at 757 Third Avenue, Suite 1702, NYC 10017 or 313 Hart Senate Building, Washington, DC 20510.