Financial Intricacies of a Co-Op to Condo Conversion

Converting a co-op into a condo may be a good idea because you will be able to own your residencial areas. This will make it easier for you to rent it out and make rennovations any time you please. If you have to move, selling a condo would be easier than transferring your shares. However, converting a co-op into a condo is a complex process that carries sizable costs and has long-term financial impications for everyone involved. This is why you and your fellow co-op residents will need to make sure you understand exactly what you are getting into.

Co-Ops vs Condos

First, you should understand the differences between co-ops and condominiums. Co-ops allow you, and your fellow residents, to own shares in a building, or a group of buildings. Thus, all residents own the building collectively and have a financial and legal stake in everything that occurs within its walls. In condos, on the other hand, each resident owns their living space. Residents do collectively own all the common areas, such as hallways, indoor gyms, reception areas, etc. In both cases, the residents have to pay monthly fees.

As with co-ops, condominiums have boards of directors that establish and enforce rules. However, those rules are not as extensive as co-op rules. You get considerable leeway in the way that you can modify and redecorate the interiors of your residence. And co-op boards tend to scrutinize any potential tenants in great detail. Condo boards tend to be much more hands off, which makes it easier for you to rent out your condo or sell it to someone else.  

How to Convert a Co-Op Into a Condo

In order to convert a co-op into a condo, at least 80 percent of the residents must vote in favor of the conversion. The board of directors will need to come up with the new set of governing documents that fit the new status of the building. The shareholders would then have to exchange their shares for deeds on their residential units. They will have to pay off the entire remaining balance on the co-op's mortgage. This expense should be equally split between all co-op shareholders. Depending on the number of residents and the value of the outstanding mortgage, this may get fairly expensive, so you will need to ensure all of the shareholders can realistically afford it.

Tax Implications of Co-Op to Condo Conversion

Another important thing to consider are tax applications. For tax purposes, the act of exchanging shares for deeds is considered a capital gain. The amount they are taxed is based on the difference between how much they paid for their shares and how much their residence is worth at the time of conversion. Together, this can add up to thousands of dollars, if not hundreds of thousands of dollars. If your residential space is your primary residence, you will be able to offset the individual tax through tax breaks. However, if your primary residence is located elsewhere, you will have to pay both taxes in full.

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