Section 216 of the Internal Revenue Code concerns cooperative housing corporations and their tenant-shareholders. A cooperative housing corporation is a corporation with one class of outstanding stock and tenant shareholders that purchase ownership of stock in the corporation are entitled to occupy a house or unit in a building owned by the corporation for dwelling purposes. 26 U.S.C. § 216(b)(1).

When tenant-shareholders purchase a cooperative, they are not purchasing a piece of real property or an apartment in a building. Rather, tenant-shareholders are purchasing shares within a cooperative corporation that owns the property or building. Thus, tenant-shareholders are purchasing stock in the cooperative corporation instead of title to property.

Recognizing that tenant-shareholders of cooperatives should be treated as owners of real property for tax purposes, Congress enacted such provisions. Section 216 allows a tenant-shareholder to deduct amounts paid to or accrued to a cooperative housing corporation to the extent that the amounts constitute the tenant-shareholder’s proportionate share of real estate taxes and interest relating to the corporation’s land and buildings, which are deductible under Sections 163 and 164 of the Internal Revenue Code. 26 U.S.C. § 216(a)(1). The interest allowable as a deduction only extends to indebtedness contracted in the acquisition, construction, alteration, rehabilitation, or maintenance of the cooperative property or in the acquisition of the land on which the houses or building is situated. 26 U.S.C. § 216(a)(2).

In general, Section 216 defines a “tenant-stockholder’s proportionate share” as a tenant-shareholder’s ownership in the cooperative corporation’s stock in the total outstanding stock of the corporation. 26 U.S.C. § 216(b)(3)(A). However, Section 216(b)(3)(B) provides for an elective alternative, which a corporation must provide election for. Pursuant to the alternative, for taxable years commencing after 1986, if a corporation issues a portion of the interest and/or real estate taxes reflecting the cost to the corporation attributable to each tenant-shareholder’s dwelling unit, including the unit’s share of the common areas in the cooperative, then the corporation is entitled to make an election in which each tenant-shareholder’s share in the corporation’s real estate taxes and interest will be equivalent to the amounts allocated. A cooperative housing corporation is required to provide tenant-shareholders with a written statement outlining real estate taxes and interest allocated to them, individually, by January 31 of the year after the first calendar year including any period to which the election applies.

Further, if a cooperative unit is used for trade purposes, business purposes, or the production of income by a tenant-shareholder, the tenant-shareholder is permitted to take deductions for depreciation under Section 216. Such deductions are expressly limited to a tenant-shareholders adjusted basis in the cooperative corporation’s stock as of the close of the taxable year of the tenant-stockholder where such deduction was incurred. 26 U.S.C. § 216(c).

Moreover, it is important to note, that tenant-shareholders are not entitled to deductions for any amount paid or accrued to the cooperative corporation during any taxable year so long as the amount is a properly allocable amount paid or incurred at any time by the corporation and is chargeable to the corporation’s capital account. A tenant-shareholder’s adjusted basis in the shares of the cooperative corporation are increased due to the disallowance. 26 U.S.C. § 216(d).