Relaxed Rule Gives Tax Break to Co-ops with Commercial Tenants

New York–Changes to federal tax regulations have made housing commercial tenants in New York co-ops more profitable than ever, The New York Times reports.Previously, because of the 80-20 rule–which requires residential co-ops to receive no more than 20 percent of their gross income from external sources, such as commercial tenants, in order to receive tax benefits–co-ops have rented commercial space at low rents and often given thousands of dollars in refunds to tenants at the year’s end.However, the law was modified last year to allow all co-ops to keep their benefits–and rental income. “This change will be a bonanza for co-ops with retail space,” Richard Siegler, a Manhattan co-op and condominium lawyer, told the Times. “Co-ops will be able to take in additional income, but the real beneficiaries will be shareholders, because now that buildings can pay expenses with rental income from commercial spaces, shareholders will get lower maintenance charges.”Co-ops now need to either qualify under the prior 80-20 rule, have at least 80 percent of the building’s total square footage be open for residential use or spend 90 percent or more of the building’s total income for the benefit of shareholders to receive tax benefits.Although the new law will affect co-ops in Chicago, Los Angeles and other cities with co-ops, New York City–where co-ops comprise 75 percent of the nonrental apartment stock–likely will see the biggest effect.Approximately 1,000 co-ops in New York have commercial space, including parking garages and retail outlets.