I Live in a Co-Op and It's Really Great; But Do I Own Stock or Real Estate?

The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.

By Gerald S. Deutsch, Esq.  

Glen Head, NY

A cooperative housing corporation is defined by §216(b) as a corporation "each of the stockholders of which is entitled solely by reason of his ownership of stock in the corporation to occupy for dwelling purposes a house, or an apartment in a building, owned or leased by such corporation." For tax purposes, §216 treats a stockholder in a co-op as if his ownership was in a house or a condominium by (i) allowing him to deduct his share of taxes and mortgage interest paid by the corporation, and (ii) allowing him to deduct depreciation if the occupied premises is used in a trade or business or for the production of income.

There are other sections of the Code that give a co-op owner benefits that a homeowner would receive, such as (i) the ability to qualify for the exclusion of gain from the sale of a principal residence (§121(d)(4)), and (ii) the availability of the Residential Energy Efficient Property Credit (§25D(e)(5)).

Yet for some purposes it is not clear whether ownership of stock in a co-op is stock or real estate. For example, a "1031 exchange" usually done with real estate does not apply to "stock, bonds, or notes" under §1031(a)(2)(B), and it is not clear whether the tax-free provisions for the exchange of stock for stock of the same corporation (Code §1036) would also apply to co-op stock. Nor is it clear whether the relief provisions for sellers of reacquired real estate (§1038) would be available to such owner (though §1038(e) would apply to a residence that was sold using §121 - which is available to a co-op shareholder).

However, if there is a "recapture of depreciation," would the more favorable provision applicable to real property (§1250) be available or only the provisions applicable to personal property (§1245)? Furthermore, in Rev. Rul. 66-40, 1966-1 C.B. 227, the IRS ruled that the interest held by a taxpayer in a New York co-op apartment as a tenant-stockholder is not considered "real property" for the purposes of a gift tax exception because "under New York law, an interest in a cooperative apartment is classed as personal property."

Because of this confusion, the owner of stock in a co-op should not assume that what he owns is real property or personal property, as it may be either for different purposes. So for example, if he is preparing a will he and wants to leave his co-op stock to a beneficiary, he should specifically identify the asset and not assume it will pass to the intended beneficiary if defined as real property or personal property.

 For more information, in the Tax Management Portfolios, see Miller, 596 T.M., Cooperative and Condominium Apartments,  and in Tax Practice Series, see ¶2860, Taxes and Interest Paid to Cooperative Housing Corporations.

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