Conversions of small New York co-op apartment buildings into condos are the topic of a New York Times news article by my former New York Sun colleague Julie Satow. Deep in the lengthy story is a discussion of the taxes involved:
From the buyer's perspective, the best approach is to buy the physical building from the co-op. In that scenario, Mr. Saft said, the investor would pay $100 million, for example, for the property, and the co-op would pay taxes on the sale, which would be around $40 million, leaving $60 million to be split among the shareholders. But then each shareholder would have to pay capital gains taxes as well — meaning shareholders would be taxed twice, reducing the final profit.
In the alternative scenario, Mr. Saft said, the buyer would purchase shares from each shareholder individually, so the shareholders would pay only capital gains taxes, not the corporate tax. But that could create big problems for the developer once the building is converted and the condos are sold.
If, for example, the co-op originally bought the building for $15 million and then reduced its tax basis to $8 million by taking depreciation deductions, the buyer's eventual gain can be offset only by the co-op's basis of $8 million, rather than the $100 million it cost to buy all those shares.
Such taxes make housing in New York more expensive, because when the new units are issued, the price has to reflect the cost of the taxes, no matter who pays them. And they also contribute to the "lock-in" problem, the phenomenon of individuals remaining in larger apartments than they need because they are reluctant to pay the taxes that would apply on a sale. Alas, when politicians in New York discuss the issue of "affordable housing," instead of talking about cutting taxes, what they talk about instead is spending more money on subsidizing housing for a few lottery winners or those who meet politically constructed criteria for receiving the subsidies.
