"Dealing With the 80/20 Test"

Section 216 of the Internal Revenue Code of 1986, as amended (the code), allows tenant-stockholders to deduct their proportionate share of the co-op’s interest expenses and real estate taxes, a valued element of co-op apartment ownership. However, §216 requires compliance with the so-called 80/20 test—80 percent of a co-op’s gross income each year must be derived from its shareholders. If a co-op’s income from sources such as rent from a garage or commercial space in a given year exceeds 25 percent of its receipts from shareholders, the co-op will lose its §216 status and its shareholders will lose their tax deductions for that year. With escalating New York commercial rents, co-op boards struggle to comply with the 80/20 test, while trying to maximize income from the co-op’s commercial space and thereby lower maintenance charges and shareholder assessments.

This column surveys old and new techniques to facilitate compliance with the 80/20 test and presents state-of-the-art options for co-ops to consider.

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