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What is the 80/20 rule for co-ops? Why do I need to pay attention?

When you own a condominium, you pay your real estate taxes — either directly or through your mortgage lender — and deduct them on your income tax. It’s pretty simple.

But when you own a co-op, you pay “maintenance” — which is an aggregation of charges to the corporation. It covers the salaries that get paid to your super and your doormen, plus roof and boiler maintenance. It also covers things you want to deduct from your taxes — like your share of the building’s real estate taxes, and your share of the interest on the building’s underlying mortgage.

According to the Internal Revenue service, the stuff you would ideally like to deduct from your taxes is completely legitimate if at least 80% of your co-op’s income comes from its shareholders. (This is known as “good” income.)
Twenty percent of the co-op’s income is allowed to be “bad” income – say from the lease of commercial spaces to retail tenants.

But if your co-op breaks the 80-20 rule — say 21% of the corporation’s yearly income comes from leasing a ground-floor site to a dry cleaner — you lose all your tax deductions. Sad!

One way for a co-op to stay within bounds is to increase the money it makes from the shareholders — in other words, to raise the monthly maintenance charges. So if you’re looking at a co-op in a hot commercial area, have your lawyer double-check the building’s financials. You don’t want to be in the position of buying into a building that has to raise its “good” income — because the source of good income is going to be you!

Posted in For Buyers and Uncategorized 12 years, 8 months ago at 3:08 pm.

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