The real estate industry is pledging to lobby in Albany against a bill passed yesterday by the City Council that revamps a 35-year-old tax break for developers with the aim of creating as many as 20,000 units of low- and moderate-income housing.

The tax break, known as 421-a, was created in 1971 to spur residential development, but a consensus emerged in recent years that the program no longer worked for the modern city market.

After weeks of negotiation, the council overwhelmingly approved a compromise measure that sought to balance the desire to update the program by eliminating unneeded incentives for “luxury” housing without stifling the construction boom.

The bill expands the areas where developers must commit to building at least 20% “affordable” housing to qualify for the incentives, and it adds an income cap to luxury housing developments seeking inclusion in the program. Some council members wanted an affordable housing requirement citywide, but the administration and Speaker Christine Quinn opposed that as too restrictive.

The real estate boom, Ms. Quinn said, “has not touched every borough equally, and there are still parts of this city where we need to encourage the real estate industry to go.”

Ms. Quinn engineered a compromise between the administration’s initial proposal, which followed recommendations by a mayoral task force, and the more radical changes pushed by some members. In the end, only five of 51 members opposed her bill.

It did little to mollify the Real Estate Board of New York, which considered even the administration’s bill too restrictive. “The board is very disappointed by the legislation,” a spokesman, Frank Marino, said. “It won’t be immediate, but over the next several years there will definitely be a reduction in building.”

The legislation now heads to Albany for state approval before the current 421-a program expires at the end of next year. “Clearly, the Board is going to make its views known in Albany,” Mr. Marino said.

The bill also creates a $400 million trust fund to encourage more affordable housing, as well as a commission to study the program every two years, assuring it keeps up with the fluctuating real estate market.

Calling passage of the bill “enormously gratifying,” the city’s commissioner of Housing Preservation and Development, Shaun Donovan, said the measure “struck the right balance” between reducing subsidies for luxury development and encouraging building in areas of the city that need it. He downplayed concerns that the bill would face obstacles in the state Legislature, where the chairman of the Assembly’s Housing Committee, Vito Lopez of Brooklyn, has said the proposal does not go far enough.

“It sends a clear message that the city is unified behind these reforms,” Mr. Donovan said in an interview. Mayor Bloomberg has pledged to build or preserve 165,000 units of affordable housing, and this bill is a key element of that plan, Mr. Donovan said.