How are Co-Ops Treated?

Question

Hi BP Community,

My wife and i currently own a co op (which we use to live in) but currently vacant.  We are in the process of subletting out the co op for rental income.  There may come a time where i need to sell the co op and was wondering how co op are treat?  since you actually don't own the property, instead you own shares of a corporation.  how will i be taxed on my capital gains?  would i be taxed as if i was selling my shares or would i be taxed as captial gains on a property and would need to do a 1031 exchange?

Thanks in advance.

Nicholas Aiola · Answer

@Gil Pang

As the ever-reliable @Dave Foster said, exchanging a coop is possible.

The long-term capital gains rates are the same whether you're selling property or shares. If you decide not to do a 1031 exchange when selling, your long-term gains will be taxed at the preferential rates.

Dave Foster · Answer

@Gil Pang, Yes, coops can generally be accorded 1031 treatment.   They are a geographically unique critter and I'll bet @Nicholas Aiola has some good feedback on the taxation issue.

Eric A. · Answer

Thanks @Nicholas Aiola and @Jason Lee looks like it’s quite complicated to calculate but possible.

Nicholas Aiola · Answer

@Eric A. Yes, you can deduct depreciation on a coop. As @Jason Lee mentioned, you can check Publication 527 on how to calculate depreciation:

Cooperatives

If you live in a cooperative, you don’t own your apartment. Instead, a corporation owns the apartments and you are a tenant-stockholder in the cooperative housing corporation. If you rent your apartment to others, you usually can deduct, as a rental expense, all the maintenance fees you pay to the cooperative housing corporation.

In addition to the maintenance fees paid to the cooperative housing corporation, you can deduct your direct payments for repairs, upkeep, and other rental expenses, including interest paid on a loan used to buy your stock in the corporation.

Depreciation

You will be depreciating your stock in the corporation rather than the apartment itself. Figure your depreciation deduction as follows.

• Figure the depreciation for all the depreciable real property owned by the corporation. (Depreciation methods are discussed in chapter 2 of this publication and Pub. 946.) If you bought your cooperative stock after its first offering, figure the depreciable basis of this property as follows.Multiply your cost per share by the total number of outstanding shares.Add to the amount figured in (a) any mortgage debt on the property on the date you bought the stock.Subtract from the amount figured in (b) any mortgage debt that isn’t for the depreciable real property, such as the part for the land.
• Multiply your cost per share by the total number of outstanding shares.
• Add to the amount figured in (a) any mortgage debt on the property on the date you bought the stock.
• Subtract from the amount figured in (b) any mortgage debt that isn’t for the depreciable real property, such as the part for the land.
• Subtract from the amount figured in (1) any depreciation for space owned by the corporation that can be rented but can’t be lived in by tenant-stockholders.
• Divide the number of your shares of stock by the total number of shares outstanding, including any shares held by the corporation.
• Multiply the result of (2) by the percentage you figured in (3). This is your depreciation on the stock.

• Multiply your cost per share by the total number of outstanding shares.
• Add to the amount figured in (a) any mortgage debt on the property on the date you bought the stock.
• Subtract from the amount figured in (b) any mortgage debt that isn’t for the depreciable real property, such as the part for the land.

Your depreciation deduction for the year can’t be more than the part of your adjusted basis (defined in chapter 2) in the stock of the corporation that is allocable to your rental property.

Jason Lee · Answer

Yes you can use depreciation for a co-op rental. The method to calculate is quite different than with real property. Look up IRS pub527 on how to calculate.

Eric A. · Answer

@Nicholas Aiola just want to get more detail on the depreciation point. Can a co-op investor deduct depreciation expense annually the same way as with a house or condo? Any differences in the number of years or the calculation or how that depreciation is treated? Since the co-op investor doesn’t own the property or land beneath, can he depreciate the entire purchase price without subtracting a land value?

Nicholas Aiola · Answer

@Gil Pang if you did a 1031 exchange, you would be able to defer taxes.

Another method of deferring taxes would be an installment sale (for example, seller financing). This would spread the capital gain tax liability over the repayment period.

One downside, however, is that depreciation recapture does not qualify for installment treatment; it must be paid in full in the year of the sale.

Gil Pang · Answer

@Nicholas Aiola so i wouldn't be able to "defer" my taxes since its co op shares?

Gil Pang · Answer

Thank you! Any other input is appreciated! :)

How are Co-Ops Treated?

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