Uncooperative Coop

Today TaxMama hears from Fred in NY who says, “I live in a co-op that is subsidized by the city in the form of a very low interest mortgage and reduced taxes. A consequence of this arrangement is that we do not build any equity in our shares. The corporation is now “going private” by buying out the city mortgage. The good news is that my equity will jump from $10,000 to over $850,000. However, the co-op board has put into the by-laws that anyone who sells their shares (their apartment) will pay a 40% “flip tax.” This means that 40% of the selling price is turned over to the co-op. My question is – Which figure is my capital gains tax based on – the gross sale – $850,000 or the net sale $510,000? The co-op’s outside accountants claim it is the lower figure. As I understand their reasoning, I am selling my shares to the co-op for the lower number and the co-op is reselling the shares for the higher number. Any comments?”

Dear Fred,

I can see why you’re concerned.

But in any sale, you are able to deduct all your costs in order to arrive at your profit. In your case, your costs include your original purchase price of $10,000 PLUS the contractual cost to buy your unit from the cooperative, of $340,000, PLUS the costs related to selling the unit – the commissions, legal fees, etc, which tend to be about 7-10% of the selling price, or $60,000.

In all, it appears that your costs (or purchase price for the Schedule D) will add up to about $410,000. Your selling price is $850,000 – so your total profit is $440,000.

Of course, you can run the numbers the other way, where you’re selling the unit to the coop for $510,000, less your cost of $10,000 and your selling costs of $60,000 – would still equal a profit of $440,000.

If you’ve lived there for more than two years, you may avoid the tax altogether on the first $250,000. If you had a spouse or co-owner living with you, you can avoid all the tax.

And remember, you can find answers to all kinds of questions about personal residences and all kinds of other tax issues, free. Where? Where else? At TaxMama.com

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