Section 216 Requirements for Co-op Tax Deductions
Understand the tax structure for co-op housing, where a shareholder's eligibility for deductions is tied to the corporation's financial compliance.
A cooperative housing corporation, or co-op, is a form of homeownership where an individual buys shares of stock in a corporation that owns a residential building. This stock ownership grants the individual a proprietary lease, giving them the right to occupy a specific apartment. For tax purposes, this structure allows co-op owners to access deductions similar to those available to traditional homeowners. Internal Revenue Code Section 216 provides this pathway, but only if both the corporation and the tenant-stockholder meet specific qualifications.
Requirements for the Cooperative Housing Corporation
For its residents to claim any tax benefits, the cooperative housing corporation must satisfy a four-part test.
- It must have only one class of stock outstanding. This ensures that all stockholders have similar rights and prevents complex ownership structures that could obscure the residential nature of the cooperative. A special exception exists for stock issued to a governmental unit.
- Each stockholder’s right to occupy an apartment for dwelling purposes must stem solely from their ownership of the corporation’s stock. This right must be conferred upon every stockholder, distinguishing it from a standard landlord-tenant relationship.
- No stockholder can be entitled to receive any distribution from the corporation unless it comes from the corporation’s earnings and profits. The only exception to this rule is during a complete or partial liquidation of the corporation.
- It must meet the 80/20 rule, which can be satisfied in one of two ways. The first is if at least 80% of the corporation’s gross income for the tax year is derived from its tenant-stockholders, primarily through maintenance fees. The second is if 80% or more of the total square footage of its property is used or available for use by tenant-stockholders.
If the corporation fails to meet any of these tests, it will not qualify for that year, and its tenant-stockholders cannot claim the deductions.
Qualifications for the Tenant-Stockholder
Beyond the corporation’s status, an individual must meet certain criteria to be recognized as a “tenant-stockholder.” To be eligible for deductions, the individual must have fully paid for their shares in the cooperative housing corporation.
The term “fully paid” does not mean that the personal loan or mortgage used to finance the purchase of the shares must be paid off. Instead, it means that the original issue price for the stock, as established by the corporation, has been paid in full. This ensures that the stockholder has a legitimate equity interest in the corporation.
The amount paid for the stock must also bear a reasonable relationship to the portion of the value of the corporation’s equity in the property. This valuation connects the price of the shares to the specific apartment the tenant-stockholder is entitled to occupy. This prevents arrangements where stock is sold at a nominal value.
Calculating Your Deductible Share
Once both the corporation and the tenant-stockholder have met their qualifications, the next step is to determine the available deduction. Tenant-stockholders are permitted to deduct their proportionate share of the real estate taxes and mortgage interest paid by the corporation itself. These are the same types of expenses that owners of single-family homes can deduct.
The calculation of this proportionate share is based on the ratio of the number of shares the tenant-stockholder owns to the total number of outstanding shares of the corporation. For example, if a tenant-stockholder owns 100 shares in a corporation with 10,000 total shares outstanding, they are entitled to deduct 1% of the eligible real estate taxes and mortgage interest paid by the corporation.
To facilitate this process, the cooperative housing corporation is responsible for providing each tenant-stockholder with an annual statement. This document, which may be a substitute Form 1098, breaks down the total amounts paid by the corporation for real estate taxes and mortgage interest. It will also state the tenant-stockholder’s specific, pro-rata share of these amounts.
Claiming the Deduction on Your Tax Return
After confirming eligibility and calculating the deductible amounts, the final step is to report them on your federal income tax return. These deductions can only be claimed by individuals who choose to itemize their deductions rather than taking the standard deduction. The deductions are reported on Form 1040, Schedule A.
The tenant-stockholder’s share of the mortgage interest paid by the co-op is reported on the line designated for home mortgage interest. The annual statement from the co-op will provide the exact figure to enter on this line.
Similarly, the proportionate share of the real estate taxes paid by the corporation is reported on the line for state and local taxes. This amount is subject to the overall limitation on state and local tax (SALT) deductions, which is capped at $10,000 per household per year.