NY Co-Op Sales & Taxes

March 18, 2020

New York “co-op” apartments are unique to the State of New York. When a person owns a co-op apartment, they own a share of a “corporation,” which is the apartment complex itself. But, at the same time, the owner of the co-op also owns a piece of real estate. That is, at least from a legal perspective. Historically, courts support the notion that co-ops are technically real estate. That’s why many co-ops are eligible for use in 1031 exchanges.

What many people aren’t aware of is that selling a NY co-op apartment can bring about a slew of taxes. When you sell a co-op, you not only trigger a New York State transfer tax, but also federal taxes as well. Fortunately, there are steps you can take to specifically lower your upcoming tax bill when you sell your co-op. And as we will see, doing so can be necessary to avoid a very hefty burden.

In this post, we will identify and discuss the multiple layers of taxation involved with NY co-op sales. Then, we will discuss two particular strategies you can employ to minimize your tax burden on a co-op sale.

Be Advised on the Layers of Taxation You Face

If you decide to sell your New York co-op in a traditional cash sale, you face multiple layers of taxation. If you decide to sell your co-op as part of an IRC Sec. 1031 exchange, then your tax situation may change dramatically. But, for our purposes here, we will focus specifically on cases involving traditional cash sales. Firstly, sellers will have to grapple with the NY State real estate transfer tax. This State tax amounts to $2 for every $500 of the sales price. On top of that, New York City sellers face an additional tax. These NYC transfer taxes can range from 1% to 2.625% of the sale price, depending on whether the so called “mansion tax” comes in to play.

Then, at the federal level, sellers face the capital gains tax. This tax will vary depending on the specifics of the situation. Finally, some co-op sellers may also face the so-called “co-op flip tax”. The flip tax is an additional transfer tax which can be imposed by a co-op apartment complex. These taxes can add up quickly. What’s more, when you sell your co-op, you’ll likely have many other transactional expenses. These can include costs such as real estate brokers commissions, inspection fees, and so forth. Minimizing your tax burden should be a prominent point of concern.

Make Capital Improvements to Increase Your Basis

One strategy you can use to lower your tax bill is to make capital improvements to your co-op apartment. By doing so, you will increase your investment in the property, which means that you will increase your “cost basis.” Your cost basis is important because that is used to determine your profit (i.e. your capital gain, or income) when you sell your co-op. Simply put, if you make $50,000 worth of capital improvements to your co-op, then you’ll increase your cost basis by $50,000. When you eventually sell your co-op with this additional $50,000 of improvements, the increased basis will mean you have less capital gain and therefore will pay less tax.

In some cases, the extra money invested in capital improvements will result in a significantly higher sales price. It’s not uncommon for a $50,000 investment to create a $100,000 or $150,000 increase in sales price. In those situations, the capital improvements may actually create a somewhat larger tax bill because of increased capital gain. But that larger tax bill will be easier to handle in that situation because of the additional income.

Invoke Section 121 to Eliminate Capital Gain

Another way to lower your tax bill on a NY co-op sale is to invoke Section 121. IRC Sec. 121 refers to the elimination of capital gain stemming from the sale of a primary residence. The amount which can be eliminated is very substantial. For individuals, the maximum is $250,000 of capital gain, and for married couples filing jointly it’s $500,000. If a person has been living in a dwelling place for at least two years during the most recent five year period, that person can use Sec. 121 to eliminate capital gain. This means that a person may want to move in to their co-op prior to the sale if they’ve been living elsewhere. This may mean that they’re only eligible for a portion of the exclusion, depending on the specifics, but it will always be financially beneficial to invoke Sec. 121.

Contact MC&C for More Information

These are just two strategies to use to lower taxes from a New York co-op apartment sale. There can be other methods as well. At Mackay, Caswell & Callahan, P.C., we’re always thinking of ways to educate our readers and help them save money. This is a big part of what we do. We regularly handle cases involving tax debt resolution, NY state income tax debt resolution, and sales tax debt resolution. The common denominator in all these cases is the drive to place our clients in a better financial situation. For more information, get in touch with one of our top New York City tax attorneys today.

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