Sunday, September 16, 2007

Throwing a Wrench Into Co-op Budgets

The New York Times
September 16, 2007
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UNEXPECTED government efficiency could put shareholders in some New York City co-ops at risk of losing income-tax deductions for interest on mortgages and property taxes.

The problem results from the interplay between two otherwise unrelated issues.

The first is the "80-20" rule, a federal tax rule that requires residential co-ops to get at least 80 percent of their gross income from their tenant-shareholders and no more than 20 percent from other sources like commercial rents.

The other is the city's property tax abatement program.

Most co-ops recapture the abatement, which is paid in a lump sum directly to the building, by assessing all shareholders for about the same amount as their individual abatements each year.

"It's a way of refurbishing the coffers of the co-op without being too painful for the shareholders," said Mary Ann Rothman, executive director of the Council of New York Cooperatives and Condominiums.

(Condominium owners get their abatements directly, and because the 80-20 rule does not apply to condos, this is not an issue for them.)

Stuart M. Saft, chairman of the co-op and condo council, said that under the Internal Revenue Code, as long as at least 80 percent of a co-op's income is from its shareholders, the shareholders are treated like homeowners for tax purposes.

If income from them falls short of 80 percent, shareholders cannot legally deduct interest and property taxes for their apartments from their income taxes, Mr. Saft said.

An assessment to recapture the city tax abatement is considered income from shareholders, and some co-ops use the assessment to help them comply with the 80-20 rule. But this year, the city has speeded up the abatement process, throwing a monkey wrench into co-ops' delicate 80-20 financial balance.

Ms. Rothman said that each year, the city sends a letter to every co-op building specifying each shareholder's abatement. In past years, that letter was sent at the end of the year, and co-ops would impose the assessment at the beginning of the next year. But this year, the city sent out the abatement letters earlier than usual.

And therein lies the problem.

Mark B. Shernicoff, a Manhattan co-op accountant, said buildings that regularly impose assessments to recapture the abatement most likely did so at the beginning of 2007 for last year's abatement.

Since the letters for this year's abatement have already arrived, some co-ops may be tempted to impose an assessment to recapture this year's abatement now. And that might well be a mistake.

Mr. Shernicoff said that if the city does not send out next year's abatement letters as early as it did this year, thus enabling co-ops to recapture the 2008 abatements in 2008, co-ops that imposed two assessments for this year will not be able to impose another one for next year. That could put them on the wrong side of the 80-20 rule.

"My recommendation for co-ops that file on a calendar-year basis is to wait until next year to impose the assessment," Mr. Shernicoff said.

"And co-ops on other fiscal years should make sure to consult with their accountant to make sure they do the assessment in the right year."

Tom Bloom

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