Most housing cooperatives have a single blanket mortgage on the entire property. All housing cooperatives pay real estate taxes on the cooperative as a whole. For over 60 years Section 216 of the IRC has put co-ops on a par with single family homes and condominiums by allowing resident shareholders in a housing cooperative to take a personal income tax deduction of a proportionate share of the co-op’s mortgage interest and real estate taxes if the co-op meets certain conditions. One of the conditions is that at least 80% of the co-op’s income comes from members.
Some co-ops have experienced one-time transactions that have adversely affected the 80% calculations and thus have denied shareholders the right to deduct their share of interest and taxes. Examples include receipt of insurance proceeds or receiving a government anti-drug program or energy conservation grant.
Small urban co-ops experience constant difficulty in meeting the 80% test when they have commercial space. For example, an eight-unit co-op may have a convenience store on the first floor. Clearly the building’s principal purpose is residential, but the rent from the store may constitute more than 20% of the co-op’s income, thus denying members the right to take a personal income deduction for mortgage interest and real estate taxes.
To provide greater fairness to co-ops and lessen the random chance that residents’ homeownership tax deductions are not taken away from them in any given year, NAHC proposes two alternate tests that co-ops could choose from in lieu of the 80% income test.
Adding these two new tests as alternatives to the 80% member income test gives co-ops more choices to preserve the homeownership deductions for members on their personal income tax returns.