Do You Know the Basic Difference Between Condos and Co-ops
What is the difference between condos and co-ops
When it comes to buying a home, condo and co-op housing may both seem like equal options. However, the two structures have very different ownership models with varying financial implications for prospective buyers. Understanding the pros and cons of each structure can help you make an informed decision about which type of housing is right for you.
Cooperative housing and condo housing are both types of residential ownership that are often referred to as “condos.” While they look similar on the surface, cooperative housing and condo housing have many differences that prospective buyers should understand before making an offer. Both of these options are known as “stacked” or “condominium” homes because they consist of separate units that share common areas such as a lobby, hallways or gardens.
You should make sure that you are familiar with the tax rules of the IRS if you are going to sell your home in order to buy a condo or a co-op. We covered the basic rules and explained the difference between condos and co-ops to help you better understand the tax rules, and how making the right moves, can save you money in taxes.
Our firm serves clients in and around New York City, and often receives questions from single-family home owners in New York City who want to sell their homes and buy a condo or cooperative apartment. Potential sellers are interested in learning how ownership of single-family homes differs from co-op ownership. Others are curious about the IRS’s tax rules for co-ops owners who use part of their monthly maintenance fees to increase their apartment’s adjusted base. These questions will be answered in the article to assist potential sellers and tax and accounting professionals who wish to improve their services and help their clients.
Condos are available in many sizes, shapes and configurations. Co-ops are a common type of co-operative, especially in the northeast United States. You can find everything from small wood-frame houses with three units, to large apartment buildings that contain hundreds of units, to sprawling communities of townhouses in parks-like settings.
Single-family home and condo owners become property owners and are issued deeds proving their ownership. Condos are owned by different owners than single-family home owners. They own the apartments but don’t acquire any ownership rights in the development or buildings that are called the common areas. These areas include the common areas, which can include lobbies and yards, central heating, air conditioning, landscaping and laundry rooms. A condo association is an indirect owner of the common areas.
The condo owner is responsible for paying his separate real estate taxes, which can be a big difference between condos and co-ops. He can claim these amounts, as well as any itemized deductions, on Schedule A of the 1040 form. The monthly fees, also known as common charges, are his responsibility. He pays the condo’s maintenance and operating expenses.
Basics of a Co-op
A co-op owner doesn’t own real property and does not receive a deed when they buy an apartment. They do however become owners of personal property, i.e. they have shares in the entire building. The building is known as a cooperative housing corporation. These shares enable owners to own particular units or apartments through what are called proprietary leases.
Monthly maintenance fees are charges that owners must pay. These maintenance costs cover salaries, utilities, and other operating expenses, as well as local property taxes, principal and interest payments, and any underlying mortgage.
A typical co-op corporation will have a mortgage. It assumes responsibility for interest and principal payments. They are passed on to shareholders as part the maintenance fees.
How Co-Op Owners Can Trim Their Taxes
Another difference between condos and co-ops is owners of co-op units, who are considering selling their apartment, should be aware of the IRS tax rules that might lower their tax bill. Currently, the IRS allows a co-op owner to increase their basis (tax cost) above the amount they paid for it. However, only capital improvements can be used and not ordinary repairs to the apartment.
Any repairs or improvements made by the co-op in common areas that are a benefit to all owners can also be used, as are assessments spent on items that benefit all.
Tax rules can be helpful when they save you money, but they can also be harmful if you don’t understand them. When a real property is sold, it’s pretty much the same whether it’s a single-family home, a condo, or a co-op. This is why it’s so important to know the tax rules, and keep track of all items that will increase the basis, thereby lowering your tax bill.
How to Maintain the Adjusted Basis
I have a client who lives with his wife in a co-op in Manhattan, and when I took them on as clients, I made sure they set up a file for it. In that file, is a copy of the settlement sheet showing purchase price and other settlement expenses that was the initial basis.
Over the five- or six-year period they owned it, I had them locate invoices, cancelled checks, etc., for any improvements that were made to their apartment. They only had one major item, a new kitchen including new appliances. They also had monthly maintenance charges for the building, as well as two assessments for building repairs.
They now have an up-to-date file that shows their co-op with the updated basis. When they eventually sell the unit, their capital gains tax will be reduced, provided the net gain on the sale exceeds the federal exclusion amount of $500,000.
It’s worth mentioning again that the IRS does not allow ordinary repairs and upkeep to be used as an increase to the basis. In addition, if you have an increase of basis during a year, it cannot be used as a deduction on that year’s tax return. However, these items are not lost. When the property is ultimately sold, they are used on the tax return as an adjustment to the cost basis, thereby lowering your taxes if the property sale becomes taxable.
Are co-ops cheaper than condos? The primary benefit of co-ops is that they are often more affordable than other types of real estate. The cost of living in a co-op is typically lower than it is in a conventional condominium because the management fees, maintenance fees, and other costs of running a cooperative can be spread over a larger number of apartment units.
A major difference between condos and co-ops is that you will not have a deed or title to the apartment, but you will generally have shares in the co-op building instead. The shares are often referred to as a “voting interest,” and they are used as a measure of each member’s level of involvement in the co-op. The more information you have about your co-op, the better it will be for you and your family. There is a difference between condos and co-ops, and if you are considering one or the other, you should get all relevant information.