Image of a real estate broker touring a co-op home with prospective buyers.

What’s a Co-op Home?

Updated January 1, 1 . AmFam Team

What exactly is a co-op house? How do co-op homes differ from condos? Learn more about co-ops and whether they’re right for you with this guide from American Family Insurance.

Short for “cooperative,” a co-op is a concept that borrows from the ideal that teamwork makes a community whole. And purchasing a home that’s part of a co-op is different from the traditional way real estate is bought as well.

So, what is a co-op home? By definition, a co-op, or a “cooperative home,” is usually a multi-family piece of real estate in which a business holds the title to the property. The residents gain equity in the building by buying shares in that business. Co-op residents own a share of the property, but not the deed to the property itself.

This relationship is akin to holding stock in a company, more than owning a piece of real estate. Co-ops are popular for a number of reasons, and come with a unique set of benefits and drawbacks. We’ll explore the tax implications for co-ops to get an understanding of the long-term financial implications of co-op housing.

Co-op Housing Pros and Cons

When co-ops succeed, it’s usually because their business decisions are tightly controlled by the resident members, who act as shareholders. This approach tends to protect the overall financial health of the entire building in contrast to condo ownership, where a resident’s stake is more focused on their own parcel of property.

What Are the Co-op Housing Pros?

One of the benefits of buying into a co-op is that there are more of them than there are condos in certain markets. If you’re shopping for real estate in those areas, your purchasing options are greatly increased when you include co-ops into the mix. Here are other benefits to buying into a co-op:

Co-op owners have property rights. Although each co-op’s bylaws and resident agreements differ, they usually provide shareholders with a voice that extends beyond their unit.

Co-ops offer tax options. Depending on state laws, tax rules for co-ops offer members flexibility in how assessors determine property values for tax assessment. Members may opt to be taxed singularly, or they can vote to have the entire value of the building assessed, where each member then pays their portion of that tax.

Co-ops deliver strong tenant protections. Co-op residents enjoy housing rights more akin to homeownership when compared to renters. Democratically operated, living in co-operative housing gives residents more of a voice on business decisions as well, assuming that their financial obligations are met and actions conform to bylaws.

Co-ops hold tax-sheltered financial reserves. With the IRS treating a co-op’s tax reserves as “patronage income,” financing projects in co-ops can be less costly when compared to similar ventures in commercially operated buildings.

Co-ops are less likely to rent out their unit. When compared to condo owners, co-op residents can prohibit absentee ownership more strictly.

What Are the Co-op Housing Cons?

With a board of directors steering major purchase decisions and other financial matters, residents may be left to pay out large sums to finance certain ventures — which is sometimes viewed as a drawback. For instance, when a new roof is needed, the entire co-op will be required to fund the project. If the total cost is $120,000 for the roof, and there are 12 members in the co-op, they’ll each be responsible for coming up with $10,000.

Other key disadvantages to co-op housing are worth noting as well include:

Closing costs when selling are typically higher. Co-op sales-related closing costs average about 8 to 10 percent of the total sale price. This is higher than what you’d expect to pay for a traditional closing — like selling a condo.

Residents are required to handle property management chores. Many co-ops require resident cooperation — in monthly volunteer hours — for routine co-op building maintenance tasks. This can be a lot to ask if you’ve got a busy schedule, or are unwilling to lend a hand. But they do offer alternatives. You can pay an individual monthly fee instead — and that money helps to cover overhead costs. But it will be money out of your pocket each month if you elect to pay instead of donating your time.

Subletting is limited. Some groups only allow a small number of individual units to be sublet, and may force multi-year leases on those that do. If your plans change after you’ve purchased, and you’d like to rent out the space, you may not be able to do so if all the available rental slots are taken.

Types of housing are limited. Given that most co-ops are multi-unit buildings, your co-op purchase options are restricted when opting for this type of housing.

Co-op Housing and Taxes

Given that co-op boards vary, it’s important that their bylaws are fully understood before purchasing a living space. You’ll also want to get details on the ratio of residents to sublets in order to ensure you’ll qualify for certain tax benefits. Here are other important co-op tax considerations:

Tax deductions are handled differently. Considered a common interest development, co-ops may benefit from mortgage interest deductions — but only when certain criteria are met. Unlike buying a house, you’ll need to be sure these criteria are satisfied before purchasing, if you want to leverage that deduction.

Co-ops may see higher charges each month. Compared to condo HOA fees, co-op monthly charges — some of which are used to pay state and federal taxes — can be significantly greater. However, it’s also likely that some of those monies will be tax deductible, and that can help offset the cost.

Sellers of co-op property may be subject to a “flip tax.” When weighing out the cooperative housing advantages and disadvantages, this one’s key. Totaling 1 – 2 percent of the total sales cost, flip taxes are imposed only on co-ops.

Although not technically a “tax”, the flip tax is really a co-op-imposed transfer fee which is payable to the co-op at closing. This fee helps the co-op manage and offset overhead costs without impacting the current residents.

Property taxes can be tricky. Do you pay property taxes on a co-op the same way you do on a normal home? In short, no. Depending more on the unit’s size and location in the building, property taxes for co-ops can vary from space to space.

While you’re shopping for homes, check in with your American Family Insurance agent (Opens in a new tab) to find out how purchasing a co-op can impact your insurance premiums and coverage options. You’ll get great coverage that suits your unique needs, whether you’re purchasing a condo, co-op or a new single family home.

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