Schumer Bill Would Loosen Co-Op Tax Law

Co-op owners soon could have an easier time claiming deductions on their income tax, as bills are moving forward in the House and Senate targeting tax laws that affect certain co-ops.

Senator Schumer introduced a bill yesterday to loosen a law requiring that at least 80% of co-op income come from its members in order for them to claim tax deductions. Earlier this month, the House passed a similar bill by a wide margin.

Mr. Schumer said the bill "will ensure that the thousands of New Yorkers affected by this discrepancy are not in jeopardy of arbitrarily losing their housing exemption every year."

Like other homeowners, co-op members may deduct their share of the building's mortgage interest and real estate taxes from their personal income tax. But members of co-ops that generate more than 20% of their income from non-shareholder sources do not have such privileges. Under Mr. Schumer's proposed bill, co-ops could qualify for deductions if 90% of their expenditures are used to maintain and improve their property, or if 80% of their square footage is residential.

According to a partner at Belkin Burden Wenig & Goldman specializing in real estate law, Aaron Shmulewitz, the current 80–20 law affects many co-ops and creates a variety of hardships for members. "A building that has a large supermarket or a gym on the first floor, and especially with rising rents in Manhattan, is faced with violating 80–20," he said.

The tax's effects cut across economic lines, Mr. Shmulewitz said. Although large supermarkets and stores are more common in middle-income neighborhoods, many high-income Park Avenue co-ops rent out offices to doctors and other professionals, a practice that helps push some toward the tax threshold. The prospect of nonresidential income crossing the 20% line leads co-ops to find costly solutions to the problem. One method is to increase the percentage of income considered residential by artificially inflating maintenance costs. Another is to lower the percentage generated by commercial rent by offering rents that are below market price.