Co-op boards help their shareholders with many issues; however, one important benefit which boards should provide—but which many don’t—is facilitating apartment tax basis adjustments for shareholders, ideally on an annual basis. Tax basis in a home, including shares in a co-op apartment, is the purchase price plus the cost of capital improvements. In a co-op, the starting point for an apartment’s basis is the amount paid for the shares in the corporation.1 When the apartment is sold, the seller must pay taxes on profits over $250,000, or $500,000 if married filing jointly.2 To determine the amount of profit, subtract the tax basis in the apartment from the sale price. Therefore, as tax basis increases, the amount of taxable gain decreases.
One common mistake made by co-op apartment owners when they sell their apartments is not adjusting the apartment’s tax basis to account for payments made by the owner to the co-op (typically, by a special assessment imposed by the corporation) which is used for capital improvements to the building.3 These adjustments can significantly reduce shareholders’ tax bills in the event of an apartment sale, especially for those who have owned their apartments for a long time. Co-op boards can take steps to help their shareholders avoid making this mistake and thus legitimately minimize their tax liability.
