80/20 Vision Keeping an Eye on Income

Say the words "80/20 rule" to a New York City co-op board, and you may be met with groans and furrowed brows. A provision in Section 216 of the Internal Revenue Service (IRS) tax code, the 80/20 rule limits the amount of commercial revenue a co-op building can take in during a year to 20 percent of the building's total cash inflow. The other 80 percent has to come from the shareholders' fees, maintenance charges, or special assessments. If a building's outside income slides one percent past 20, shareholders forfeit valuable tax write-offs and abatements.

"80/20 goes back to the 1940s," says Gerald Marsden, a partner with the Manhattan-based financial firm of Eisner & Lubin LLP, "and it really hasn't been changed since, except for little things here and there."

Origins aside, 80/20 is often a thorn in co-ops' sides, because given property values in New York City, some co-ops are sitting on potential goldmines, if only the buildings could capitalize fully on their commercial spaces. Because of the rule, however, buildings are forced to charge rents far lower than what they could get on the open market.

How It Happened

The 80/20 rule came about when the federal government determined that people living in housing cooperatives were, in fact, homeowners.

"It's my conjecture," says Marsden, "that somebody convinced somebody in Congress to push 80/20 through, saying, "˜We'd like to get the tax benefits of home ownership - the deduction for real estate taxes, the deduction for mortgage interest, and the ability to get $250,000 or $500,000 in effect tax-free when we sell' - making owning shares in a co-op more like outright home or condo ownership."

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2 Comments

  • What are the tax consequences for a Holder of unsold shares if it cannot qualify as a tenant-stockholder?
  • vbertolinojr@optonline.net on Thursday, March 22, 2012 12:41 PM
    total income (97%) comes from shareholders so when the co-op recieved a property rebate check of $675,266 ,would the shareholders qualify for a check based on the # of shares they own.