Cooperative and Condominium Apartments (Portfolio 596)

Tax Management Portfolio, Cooperative and Condominium Apartments, No. 596-3rd, treats the federal income tax consequences of the two principal forms of individual equity ownership in a residential unit in a larger development — the cooperative unit and the condominium unit.

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Description

Tax Management Portfolio, Cooperative and Condominium Apartments, No. 596-3rd, treats the federal income tax consequences of the two principal forms of individual equity ownership in a residential unit in a larger development — the cooperative unit and the condominium unit. Although the more common situation is that of an apartment in a multi-unit structure, the same rules apply where the individual units are one-family dwellings, townhouses, garden apartments, or any combination.
This Portfolio deals with the federal income tax consequences of each of these two very different forms of ownership — cooperatives and condominiums — from three different points of view: (1) that of the owner of an individual unit; (2) that of the entity (i.e., the cooperative housing corporation or the condominium management association); and (3) that of the owner of real estate who wishes to establish a regime of either type. In those instances where there is a scarcity of authority on an important point, an analytical discussion is provided so as to provide the reader with at least some guidance. In some cases, the legislative history provides the only clues and accordingly is examined in some detail.

Authors

Joel E. Miller

Joel E. Miller, A.B., Columbia College (1954); J.D., Columbia University School of Law (1956); LL.M. in Taxation, New York University Graduate School of Law (1964); Law Secretary to Honorable Harold R. Medina, Judge, U.S. Court of Appeals for the Second Circuit, 1956–1957; associated with Paul, Weiss, Rifkind, Wharton & Garrison, New York, N.Y., 1957–1960; associated with and member of Demov, Morris, Levin & Shein, New York, N.Y., 1961–1969; member of adjunct and full-time faculty, St. John's University School of Law between 1976 and 1989; Chair, Subcommittee on Condominiums and Cooperatives, Committee on Real Estate Tax Problems, Section of Taxation, American Bar Association; Chair, Subcommittee on Liens, Cooperatives and Condominiums Committee, Real Property Law Section. New York State Bar Association, Tax Section; co-author, Modern Trust Forms and Checklists (Warren, Gorham & Lamont, Inc. 1980); author, Federal Taxation of Trusts (Prentice-Hall, Inc., 1968); contributor to Tax Law Review, Journal of Real Estate Taxation, Journal of Taxation and other legal publications on matters involving federal taxation and property law; editor, Real Estate Tax Ideas 1979–1983; member, several advisory boards; and lecturer at various tax institutes. Note: Portions of this portfolio are taken from articles written by Mr. Miller and originally published in the Journal of Real Estate Taxation (Warren, Gorham & Lamont, Inc.).

Table of Contents

Portfolio Description

Authors

Description

Detailed Analysis

  1. Introduction
  2. Income Tax Incentive
  3. Terminology Used in Portfolio
  4. Legal Concepts in General
  5. Applicability of Code Provisions in General
  6. The Supreme Court's Rule
  7. The IRS's Approach
  8. Nominees
  9. Limiting Rules
  10. Outline of Portfolio
  11. What Is a Cooperative Apartment?

Introductory Material

  1. True Housing Cooperatives
  2. Essential Elements
  3. Full-Ownership Housing Cooperatives
  4. Limited-Equity Housing Cooperatives
  5. Name-Only Housing Cooperatives
  6. Underlying Issues
  7. Realty or Personalty?
  8. If State Label Controls
  9. If There Is a Federal Meaning
  10. Is It “Stock”?
  11. Tangible or Intangible?

III. Taxation of Cooperative Apartment Owner While Owner

Introductory Material

  1. Income Issues
  2. Actual Receipts from Corporation
  3. Initial Grant of Possessory Rights
  4. Stock Dividends
  5. Constructive Receipts from Corporation
  6. Cancellation of Indebtedness
  7. Improvements by Sub-Lessee (§109)
  8. Deduction Issues
  9. Realty Taxes Paid Directly
  10. Interest Paid Directly
  11. In General
  12. “Personal Interest” Disallowance (§163(h))

(1) “Qualified Residence Interest” in General

(2) Application to Cooperative Apartment

  1. Maintenance Payments
  2. By Income-Seeking Owner
  3. By Personal-Use Owner

(1) “Countable Corporate Realty Tax” (§216(a)(1))

(a) Taxes on Realty Not Owned by Corporation

(b) Fee Ownership Not Required

(c) “Tax Equivalency Payments” (“PILOTs”)

(d) Applicability of AMT Limitation

(2) “Countable Corporate Interest” (§216(a)(2))

(a) “Points”

(b) Taken-Over Debt

(c) Refinanced Debt

(d) Possible §163(h) Limitation

(3) Meaning of “Proportionate Share” (§216(b)(3))

(a) The Per-Share Method

(i) The Statutory Language (§216(b)(3)(A))

(ii) Where There Are Governmental Units

(iii) The Regulations' Attempted Other-Income Limitation

(iv) Where the Corporation Holds its Own Shares

(v) Weaknesses of the Per-Share Method

(b) The Trace-Through Method

(i) Background

(ii) The Statutory Language (§216(b)(3)(B))

(iii) Pre-Conditions to Election

(iv) The Election

(4) Necessity of §163 or §164(a)(1) Deductibility by Corporation

(5) Deductibility by Corporation Not Sufficient

(6) Duplication Rather Than Passthrough

(7) The Regulations' Attempted Delinquency Limitation

(8) Timing Issues

(9) Rental Surcharges

(10) Life or Term Tenant

(11) Payments on Behalf of “Tenant-Stockholders”

(12) Effect of Refund to Corporation

(13) Is a §216(a) Deduction for “Interest” and “Taxes”?

(a) The Code's Distinguishing References

(b) The Interest Reporting Rule

(c) Deductibility by Decedent's Successor

(d) The Regulations' Language

(e) Other Interest-and-Taxes Descriptions

  1. Depreciation
  2. Background
  3. Deduction Requirements (§216(c)(1))
  4. Deduction Amount
  5. Computing the Corporation's Hypothetical Deduction

(1) The Method

(2) The Base

(3) Later Determinations

  1. Casualty Losses
  2. Certain Mortgage Insurance Premiums
  3. Credit Issues
  4. Energy Credits
  5. Homebuyer Credit
  6. Taxation of Cooperative Apartment Owner on Disposition

Introductory Material

  1. On Sale or Exchange
  2. Amount of Gain or Loss
  3. Deductibility of Loss
  4. Character of Gain or Loss
  5. Deferral of Gain or Loss Recognition
  6. Section 1031(a)(1)

(1) Cooperatives As Real Property

(2) What Property Is “Of Like Kind”

  1. Section 1036(a)
  2. Gain Exclusion Under §121
  3. Possible Effect of §216(e)
  4. Other Dispositions
  5. Charitable Donation
  6. Gift with Retained Interest
  7. Gift to Non-Citizen Spouse
  8. Disposition by Non-Resident Alien
  9. By Gift
  10. Upon Death
  11. Related Matters
  12. Re-Acquisition of Sold Apartment (§1038)
  13. IRS Lien
  14. Redemption Rights
  15. Sale or Exercise of Purchase Rights
  16. Qualification as “Tenant-Stockholder” (§216(b)(2))

Introductory Material

  1. Summary of Requirements
  2. The Paid-in-Full Requirement
  3. The High-Enough-Price Requirement
  4. The Statutory Language
  5. Applying the Requirement
  6. Valuing the Apartment
  7. When the Requirement Is to Be Applied
  8. Re-Allocations
  9. The “Not Less Than” Problem
  10. The Discount Problem
  11. Taxation of “Cooperative Housing Corporation”

Introductory Material

  1. Income Issues
  2. “Artificial” Income from Shareholders
  3. On Distributions of Property in General
  4. On Conversion to Condominium

(1) Possible Effect of Proprietary Lease on Value

(2) Possible Relief Under §216(e)

(a) Potential Regulatory Limitations

(b) The Corporate-Qualification Issue

(c) The Dwelling-Unit Issue

(d) The In-Exchange-For Issue

(e) The Used-as-Principal-Residence Issue

  1. On Allowing Bargain Use of Commercial Space
  2. On Allowing Bargain Use of Apartments
  3. Amounts Refunded to Shareholders
  4. Actual Return in Same Year
  5. Credit Against Later Charges
  6. Amounts Held as Agent
  7. Payments Received for Stock (§1032)
  8. Capital Contributions (§118)
  9. The IRS Position
  10. Need Not Be Voluntary
  11. Enforcement Mechanism Irrelevant
  12. The Purpose Test
  13. The Tracing Problem
  14. Voluntary Characterization as Rent
  15. “Flip Taxes”
  16. Relief from Indebtedness
  17. Gift
  18. Bankruptcy
  19. Insolvency
  20. Contribution to Capital
  21. Price Reduction
  22. Friendly-Party Acquisition
  23. Deduction-Eligible Interest
  24. Receipt from Seller to Cooperative
  25. Possible Exclusion Under Subchapter T
  26. Deduction Issues
  27. Possible Deduction of Payments to Shareholder-Lessees
  28. Basic Nature and Kinds of Cooperatives
  29. Early Tax Treatment of Cooperatives

(1) The Early Special Rule for Cooperatives

(2) The “With or For” Issue

(3) The Scrip-Treatment Whipsaw

  1. Purpose of Sub T
  2. Basic Operation of Sub T
  3. The “Patronage Dividend Deduction Rule”

(1) What is a Statutory “Patronage Dividend”?

(a) Eligible Recipients

(b) Eligible Types of Income

(i) “Cooperator-Derived Income”

(ii) “Directly-Related Income”

(iii) “Coop Bank Income”

(c) Pre-Existing Obligation

(2) Time of Payment

(3) Form of Payment

  1. Applicability to Housing Cooperatives

(1) The Trump Village Case

(2) The Thwaites Case

(3) The IRS's Position

  1. Limitations on Deductions
  2. Nature of the Problem
  3. The Theoretical Answer
  4. The Approach Actually Used
  5. The §277(a) Deduction Limit

(1) In General

(2) Applicability to Housing Cooperatives

(3) Revenue Ruling 90-36

(4) Investment Income

(5) Credits

(6) Other Effects of §277(a)

  1. The Subchapter T Deduction Limit
  2. Pre-1974 Depreciation

VII. Qualification as “Cooperative Housing Corporation”

Introductory Material

  1. Background
  2. The Statute's Definition
  3. Summary of Requirements
  4. A Corporation Having Shareholders
  5. Eligible Entities
  6. Eligible Interests
  7. Who Is the Shareholder
  8. The One-Class-of-Stock Requirement (§216(b)(1)(A))
  9. Permissible Differences
  10. Sources to Be Considered
  11. Meaning of “Outstanding”
  12. Stock Pledged by the Corporation
  13. Exceptions
  14. The Link-to-Eligible-Space Requirement (§216(b)(1)(B))
  15. Every Shareholder
  16. Time Sharing
  17. Summary of Necessary Elements
  18. The Stock-as-Source Element
  19. Allocation of Shares
  20. Effect of Requiring Proprietary Lease
  21. Other Sources
  22. The Owned-by-Corporation Element
  23. The Necessary-Rights Element
  24. As Against the Corporation
  25. Exclusion Right
  26. Live-In Right in General
  27. Cases Where No Live-In Right Required
  28. The Actual-Eligible-Space Element
  29. Existence of the Space
  30. What Spaces Are Eligible

(1) Two Different Approaches

(2) The “House” and “Apartment” Rulings

(3) Revenue Ruling 90-35

(4) Effect of Local Code Violation

(5) Inclusion of Other Space

  1. The No-Entitlement-to-Distribution Requirement (§216(b)(1)(C))
  2. Meaning of “Entitled”
  3. “Good” and “Bad” Distributions
  4. No Requirement of “Good” Distributions
  5. Constructive Distributions
  6. The One-of-Three-Percentages Requirement (§216(b)(1)(D))
  7. The 80% Gross Income Test
  8. Meaning of “Gross Income” in §216(b)(1)(D)(i))
  9. Meaning of “Derived from Tenant-Stockholders” in §216(b)(1)(D)(i)

(1) Receipts from Shareholder-Lessees

(2) Receipts from Third Parties

(a) Concession Income

(b) Rent Insurance Proceeds

(c) Refunds Received by Cooperative

(d) Rents from Taken-Over Apartments

  1. Possible Ways of Dealing with Test

(1) Increasing Good 80/20 Income

(a) Increasing Maintenance Charges

(b) Use of Additional Space by “Tenant-Stockholders”

(2) Avoiding Bad 80/20 Income

(a) Rents

(b) Investment Returns

(3) Use of Short Year

(4) Use of Related Entity

  1. The 80% Square Footage Test
  2. The 90% Qualifying Expenditures Test
  3. More than One Shareholder
  4. Maintenance Related to Shareholdings
  5. Source of the Problem
  6. Examples Showing Potential Abuse
  7. The Price-Per-Share Proposition
  8. The Maintenance-by-the-Share Proposition
  9. Possible Implied Requirement
  10. Governmental Units
  11. Period of Qualification
  12. No Reasonable Relationship Among Shares Requirement

VIII. Taxation of Creator of Housing Cooperative

Introductory Material

  1. Capital Gain Treatment
  2. The Multiple-Sales Approach
  3. The Single-Sale Approach
  4. Gain Recognition Deferral Under §351
  5. Reason for Existence of §351
  6. Effects of Applicability
  7. Covered Property Exchangers

(1) Loss

(2) Gain

(3) Basis

  1. The Corporation
  2. Not Optional
  3. Basic Requirements
  4. Possible Issues
  5. Lack of Prior Affiliation
  6. Different Kinds of Property
  7. Shares Not to Be Taken into Account
  8. Transferors Not to Be Taken into Account
  9. What Is a Condominium Apartment?
  10. Taxation of Condominium Unit-Owner

Introductory Material

  1. As Owner of Realty
  2. Rehabilitation Credit
  3. Energy Credits
  4. Homebuyer Credit
  5. As Association Member
  6. Taxation of Condominium Unit-Owners Association

Introductory Material

  1. The Rules Outside of §528
  2. The Rules Under §528
  3. Reason for §528
  4. Basic Operation of §528
  5. “Exempt Function Income”
  6. The Source Test
  7. The Nature-of-the-Obligation Test
  8. The Purpose Test
  9. The Includibility-in-Gross-Income Test
  10. Tenants of Unit-Owners
  11. Reasons Not to Elect §528 Treatment
  12. Meaning of “Association Property”
  13. Held by Association or Unit-Owners in Common
  14. Owned by Governmental Unit
  15. Held Privately

XII. Qualification as “Condominium Management Association” (§528(c))

Introductory Material

  1. The Substantially-Residential Test
  2. The Purpose Test
  3. The 60% Income Test
  4. The 90% Expenditure Test
  5. The Lack-of-Private-Benefit Test
  6. The Election
  7. Revocation
  8. Extension of Time

XIII. Taxation of Creator of Condominium

Introductory Material

  1. Gain Deferral
  2. The Overall Project
  3. Individual Sales
  4. Capital Gain Treatment
  5. Use of Pre-Condominiumization Sale
  6. Initial Retention of Land
  7. Possible Exceptions
  8. Section 1237
  9. The Counting-of-Factors Approach
  10. The Any-Liquidation-of-Investment Approach
  11. The Only-Feasible-Disposition Approach
  12. The Necessary-to-Prevent-a-Loss Approach
  13. The Unable-to-Give-Away Approach
  14. The Forced-Liquidation Approach

XIV. Timeshare Associations

  1. Buying or Selling a Foreign-Owned Apartment: What FIRPTA Requires

Introductory Material

  1. Introduction
  2. Two Key Terms
  3. “Disposition”
  4. “United States Real Property Interest”
  5. The FIRPTA Gains-Taxing Rules
  6. The Applicable Basic Gains-Taxing Rule; “§897(a)(1) Gains”
  7. Which §897(a)(1) Gains Are Taxable
  8. What the Statute Does
  9. What the Regulations Do Not Do
  10. What the Regulations Do; Their Implicit General Rule
  11. The Failure-to-File Unshielding Rule
  12. The Kind-of-Property-Received Unshielding Rule

(1) Statement of the Rule

(2) General Nature of the Rule

(3) The Rule's Meaning of “Nonrecognition Provision”

(4) What the Rule Does

(5) Some Issues in Applying the Rule

  1. Applicability of Certain Normal Shielding Rules
  2. Non-Recognition Under §121
  3. Non-Recognition Under §453
  4. Non-Recognition Under §1031
  5. Non-Recognition Under §1036
  6. The FIRPTA Withholding Rules
  7. The Basic Withholding Rule
  8. Two Meanings of “Withholding” an Amount
  9. The “Foreign Person” Element; Certifications of Non-Foreign Status
  10. The “United States Real Property Interest” Element
  11. The “Amount Realized” Element
  12. What the Transferee Must Do
  13. Withholding Certificates
  14. The Setting Aside Requirement
  15. The Remitting Requirement
  16. The Amount to be Remitted to the IRS
  17. No “Amount Realized”
  18. Governmental or Other Exempt Transferee
  19. Residential Use and Low-Enough Price
  20. The Maximum-Tax-Liability Limit; Applicability of §121
  21. If a Normal Shielding Rule Applies

(1) No Taxable Gain

(2) Some Taxable Gain

  1. Installment Sales
  2. Agreement with IRS with Security
  3. Lack of Jeopardy
  4. Meanings of Terms Used

Working Papers

Table of Worksheets

Worksheet 1 Example of Contrasting Per-Share and Trace-Through Allocations Under §216(b)(3)(A) and (B)

Worksheet 2 Paragraph to be Included in Lease if Two or More Leases Contain Safetycaps

Worksheet 3 Paragraph to be Included in Lease if No Other Lease Contains a Safetycap

Worksheet 4 Checklists

 

Working Papers

Working Papers

Table of Worksheets

Worksheet 1 Example of Contrasting Per-Share and Trace-Through Allocations under § 216(b)(3)(A) and (B)

Worksheet 2 Paragraph to be Included in Lease if Two or More Leases Contain Safetycaps

Worksheet 3 Paragraph to be Included in Lease if No Other Lease Contains a Safetycap

Worksheet 4 Checklists

Worksheet 5 Key Revenue Rulings

Bibliography

OFFICIAL

Statutes:

Treasury Regulations:

Legislative History:

Treasury Rulings:

Cases:

UNOFFICIAL

Treatises:

Miscellaneous:

Periodicals:

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