Question: Our co-op told us the amount of our STAR refunds and then accessed the same amount. What’s the thought behind this practice?
— Show me the money, Upper West Side
Dear Show:
There are few issues of building governance more contentious than tax rebates.
In typical New York fashion, there’s very little about the process that’s intuitive or straightforward. You’d think that somebody in Albany or City Hall, or both, would think that maybe they could just cut taxes instead of going through the tax-and-rebate two-step dance every year. You’d think. But why make something simple when you can make it complicated?
Rant over.
What your building is doing is not at all unusual. Many buildings slap a special assessment that matches the annual tax rebate. It’s a relatively painless way to pay for capital improvements to the building or to bolster the building’s coffers without boosting the monthly maintenance fee.
The practice stems from the way co-op pay taxes. The owners of condos and single-family homes are taxed individually as each property is a separate tax lot.
Not so for co-ops. Since you are a co-op shareholder, you know that you don’t actually own your apartment. You own shares in the co-operative corporation that owns the building, which has given you a proprietary lease for your apartment. From the city and state governments’ points of view, then, there is just one tax lot and one taxpayer — the co-operative. Your individual tax bill then is determined by the co-op based on your percentage of ownership of the whole building.
Here’s how it works: Imagine a 10-unit building with each shareholder owning 10 shares. If the annual tax is $10,000, you and each of your neighbors is assessed $1,000. You pay the co-op a portion of that every month, and it, in turns, pays the government two or four times a year. In November of each year, the government rebates $2,000, or the equivalent of $200 for each unit, to the co-op. The co-op board decides it wants to use that money for new carpet in the lobby and assesses every shareholder $200 to pay for it. Voila! Money you paid in taxes is now putting new carpet in the lobby. Not an awful deal.
And there’s a nice little bonus: Special assessments can be counted as part of the cost basis of your apartment. In today’s market, that can be valuable as you can add up all of your building’s assessments over the years and add them to the cost of your apartment. If you are married, filing jointly, you can have a gain of $500,000 tax free. So if that apartment you bought in 2007 for $500,000 is now selling for $1.1 million, you can reduce your potential income tax liability by the cost of the capital assessments you paid over the years.
David Crook is a veteran journalist and author of The Complete Wall Street Journal Real-Estate Investing and Homeowner’s Guidebooks. Do you have a question about anything real estate-related in NYC? Write him at askus@streeteasy.com. For verification purposes, please include your name and a phone number; neither will be published. Note: Nothing in this column should be considered professional legal advice. If you have a legal issue, consult an attorney.
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