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.
SOLVING 80/20 PROBLEMS
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.
SPEAKER VALLONE PROPOSES
DEEPENING THE TAX ABATEMENT
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.