Tax-Abatement Assessment: What to Do When Not Everyone Gets Abated?
June 4, 2013 — If you've lived in a cooperative or condominium during the past 15 years and the proper forms were filled out, chances are you've been getting a tax abatement on your apartment. The Cooperative and Condominium Tax Abatement Program is responsible for that, giving tax abatements to Residential Class 2 properties — that is, condos or co-ops with more than three units. Any apartment in a Class 2 building is eligible, except units receiving any other type of abatement; sponsor units; units that are used for non-residential purposes; and units owned by someone who owns three or more units in the same building.
The abatement was the result of state legislation, first passed into law in 1998 and renewed regularly ever since. It was originally enacted as a temporary measure to compensate for the discrepancy between the taxes on single-family homes and the much higher taxes on co-op and condo apartments in multi-unit buildings. This fall, there was some delay in renewing the law, but the legislators eventually came through, extending it to June 30, 2015.
A good thing, right? Well, yes and no.
Revving Up Revisions
The revised law, which will be phased in over this tax year and the next, excludes non-owner-occupied apartments from the abatement program, a category that the city's Department of Finance says includes all trusts or limited liability companies (LLCs).
Complicating matters: the city has already passed along the abatement to everyone for the 2012-2013 tax year. In the case of co-ops, the city gives the corporation a tax credit for the abatement amount, which is earmarked for a unit (not a person). The corporation board then gives the shareholder a credit on his or her maintenance. If the shareholder is deemed ineligible for the abatement — because of the new wrinkles in the law regarding non-owner-occupied apartments — the co-op board will have to retrieve the money by taking away the credit.
The non-resident-shareholder
would pay more because
assessments must be levied equally.
A major snag comes from the way most co-ops have treated the abatement in the past: they have levied an annual assessment that is just about equal to the abatement as a way to make ends meet. So, shareholder Jane Doe gets an abatement for, say, $1,000 and the co-op levies a $1,000 assessment; the co-op gets $1,000 from Jane Doe, but Jane is no poorer because the abatement pays for the assessment (she's also no richer, which is another story). The corporation can use that extra money to pay taxes, build up its reserves, whatever.
A Great Disturbance in the Force
But now, that delicate balancing act has been upset. If, for this 2012-2013 tax year, the co-op credited Jane Doe and all the other shareholders with, say, a total of $100,000 in abatements and levied them $100,000 in assessments, a problem could come up. With the exclusion of non-owner-occupied apartments, the number of units eligible for abatements may have gone down, so now the corporation assesses everyone a total of $100,000 but only receives $50,000 in abatements. Because all shares must be treated equally, the co-op would still have to charge those newly disqualified residents the $50,000 difference.
For condos, the situation is simpler. Condo owners pay their taxes personally, so the abatement comes directly to them, not through the corporation. Experts say condo associations also do not levy the abatement-canceling assessments popular with co-ops.
By 2014-2015, the abatement phase-out for non-owner-occupied apartments will be over. But there is still something else to consider before then: What should co-ops do about that assessment that has traditionally been levied — the one that is equal to the abatement?
Decision Time
Co-op boards will have to decide if they will levy it at all. For the resident-shareholder, it evens out. The non-resident-shareholder, however, would have to pony up more money than his neighbor, because assessments must be levied equally against all shareholders.
"Can they do it?" asks Paul Korngold, a partner at Tuchman Korngold Weiss Liebman & Gelles. "Sure, they can. But there will be a certain percentage of the building that will start screaming." And if they don't assess and simply let the abatements go through, they stand to lose a big chunk of change that was counted on every year.
"This is an administrative nightmare," says Michael Rogoff, vice president of Akam Associates, a management firm.
Rogoff says he advised all his clients to wait until June to credit the abatement to the units to see how many are actually deemed to be ineligible. Abraham Horwitz, a CPA with Czarnowski & Beer, says that most of his co-ops are also in a wait-and-see mode. "Generally, that's done in the spring," Horwitz says.
Whenever it's done, some shareholders or unit-owners may lose out on their tax abatement because the city, erroneously, claims they're not the primary resident. For more on this and what to do about it, read part 2 or pick up the June issue of Habitat.
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