What is the 80/20 Rule and Good Income vs. Bad Income?
Section 216 of the Internal Revenue Code, commonly known as the 80/20 rule, grants co-op owners certain tax deductions, provided that at least 80 percent of a housing cooperative’s income comes from shareholders. Tenant/shareholder related income is often referred to as “good income.” Income from other sources (commercial rent, interest income, etc.) are referred to as “bad income.” The code was established to give urban dwellers the same rights as suburban homeowners. However, the regulation can become a problem for buildings that include rental space such as commercial store fronts. Any increase in “bad” income must be offset by a larger amount of “good” income. Failure to maintain the 80/20 balance can result in the co-op losing its tax status for the year. As a result individual shareholders will not be able to deduct mortgage interest and property taxes. Any owners who were to sell an apartment during the year would be unable to take advantage of the exclusion from capital gains b
