Council of New York Cooperatives & Condominiums
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Legislative Issues

Published: Summer 2001

Pending Legislation

With the passage of the property tax abatement extender and the U.C.C. 9 modifications that address loans on cooperative units, CNYC and its members can already celebrate a year of legislative success. Listed below are several more legislative initiatives, that CNYC is supporting and hopes soon to see enacted into law.

When veterans purchase houses or condominiums, the government provides special low rate mortgages to help with this purchase, but it does not provide similar support when a veteran purchases a cooperative. Congressional representative Carolyn Maloney has worked for several years to ensure that veterans benefits can also be used for the purchase of cooperatives. This year, her legislation (HR 1808) has, many significant co-sponsors in the House, and Charles Schumer has introduced identical legislation in the Senate (S.1203). The National Association of Housing Cooperatives (NAHC) is working to gain support from veterans groups and from members of appropriate committees in both senate and house. CNYC is optimistic that the broad appeal of this legislation will transcend party politics and ensure its passage.

Section 216 of the Internal Revenue Code recognizes housing cooperatives as homes. Provided that certain requirements are met, Section 216 enables shareholders to take homeowner deductions on their federal income tax for their proportional share of property taxes and mortgage interest paid by the cooperative. One requirement is that 80% of the income of the cooperative must come from the tenant shareholders.

This 80/20 provision has caused problems for many cooperatives. At one end of the spectrum are buildings with financial problems, where the solutions cause them to run afoul of the 80/20 rule. An example is cooperatives whose sponsors owned large numbers of apartments occupied by rent controlled or stabilized tenants whose rent did not equal the maintenance charges on the units. Often these sponsors have simply walked away, leaving the occupied units in the hands of the cooperative. Unfortunately, the rent paid by the tenants – despite the fact that it didn't even equal the cost of operating the unit – was not from shareholders and therefore could jeopardize their 80/20 quantification. Similarly, when a near-bankrupt cooperative negotiates a reduction of its mortgage indebtedness, the "cramdown" amount must be reported for income tax purposes, where it counts as 'bad' income, potentially jeopardizing the 80/20 status of the cooperative. At the request of CNYC and NAHC, Congressman Charles Rangel, the ranking minority member of the powerful Ways Committee has introduced H.R. 1788, which removes such revenue from both sides of the 80/20 calculation.

Cooperatives with commercial space can also have problems with the 80/20 rule. As space has become more and more valuable, the rent that the cooperative could charge for its stores and offices could easily exceed the 20% of revenue permissible under Section 216.

Furthermore, two changes in the tax law have made the strict 80/20 rule unnecessary. First, Subchapter T, IRC 1381 et seq., added in 1962, subjects housing cooperatives to a tax on their unrelated income separately from their member income. Second, the regulations, 1.216-1(d)(3), now require a reduction in the amount of the deduction allowable to the homeowners based on the unrelated income. Since these subsequent rules protect the IRS against misuse of the cooperative form, the draconian 80/20 test is both unnecessary and overly harsh.

Mr. Rangel is working on legislation to eliminate the 'cliff' at 80/20. Under discussion substituting a principal purpose test for the 80/20 revenue test. CNYC has reached out Senators Schumer and Clinton for their support in promoting a solution to this problem.
CNYC seeks specifics on the scope and magnitude of 80/20 problems, to help ensure that the legislation being developed will be comprehensive.. If your cooperative is grappling with 80/20, kindly write to CNYC with a brief description of the problems that you are facing.

At CNYC's 21st annual Housing Conference on Sunday, November 11, Tom Pasquazi will lead a discussion of 80/20 issues. Accountant Mark Shernicoff and Attorneys Joel E. Miller, Alan Solarz, and Marc Luxemburg will discuss the various aspects of 80/20. Continuing professional education credit is available to accountants taking this class and application has been made for continuing legal education credit as well. Consult the Conference brochure inserted opposite page 10 of this Newsletter.

At CNYC's Annual Meeting in March, City Council Speaker Peter Vallone announced his plan to deepen the property tax abatement program to further progress towards tax fairness for New York City homeowners in cooperatives and condominiums. He proposed increasing from 25% to 40% the abatement in cooperatives and condominiums where the assessed value averages $15,000 per apartment or less, and increasing the abatement for apartments with higher assessments from 17.5% to 20%. The deepening of the abatement was not included in the City budget for fiscal 2002, which did extend the present abatement for three more years at present levels (see pages 3 and 4). However, the Mayor and City Council agreed to include the deepening in an omnibus bill along with a number of other revenue proposals requiring State authorization. The legislature has all of this year and next to consider this legislation.


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