Saturday, September 12, 2009

Last Chance to Buy a Co-op, Taxes Start October 1st

Considering a co-op for your next home, or getting out of one? Going to settlement this month will be the only way to avoid the hefty taxes that co-op buyers and sellers were once immune to. Thanks to an amendment nestled away in the DC Budget Support Act, the tax benefits of purchasing a co-op will cease to exist as of October 1st. Called the "Economic Interests in Real Property Clarification Amendment Act of 2009," the Act might be better dubbed the co-op killer of 2009.

The sale of co-ops, technically a transfer of an economic interest more akin to the purchaser of stock than a transfer in title, is not currently taxed by the District of Columbia. The absence of recordation taxes is one of the few incentives to buying into a cooperative, most of which have more onerous rules than condominiums, carry underlying obligations to the purchaser, and bestow on the Board of Directors the power to reject applicants, all of which tends to suppress the price of co-ops below that of an equivalent condominium.

The amendment changes the phrase in the Deed Recordation Tax Act (Section 302b(a) to be specific) from "a transfer of an economic interest in real property" to "a transfer of an economic interest in real property, including shares in a cooperative housing association." Henceforth, co-op buyers, and sellers, will be subject to the same 1.1 % (for properties selling below $400,000) to 1.45% transaction tax that applies to other types of property.


Anonymous said...

So in other words most homeowners will no longer subsidize coop owners.

Seems like a change that should have happened years ago. If coops aren't attractive other than for the tax advantage, then they should wither away.

Anonymous said...

Well, property taxes remain, on average, lower for coops, which I'd always figured was the real draw. I think the biggest advantage over condos (and there are plenty of disadvantages as the article notes) is that the coop, itself, can take out mortgages, so that property upgrades can be financed (and you can take a mortgage interest deduction on them) rather than paid for with special assessments, as in condos. All other things being equal, and given a financially responsible board, in my observation coops tend to be better maintained over time than condos, for that reason and because rule frequently create high owner occupancy rates.

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