Co-ops: Real or Personal Property?

Real property situated in New York, whether owned by a resident or nonresident of New York, is subject to New York estate tax. However, New York courts and the Department of Taxation and Finance have long held the position that interests in cooperative apartments are not real property and instead treat such interests as intangible personal property for purposes of New York estate tax. (In Re Estate of Jack, 484 N.Y.S.2d 489 (N.Y. Surr. Ct. 1985); TSB-M-81(1)(Feb.20, 1981)) Therefore, nonresidents will be happy and perhaps surprised to learn that their interest in a New York cooperative apartment is exempt from New York estate tax.

There are several provisions within New York Tax Law that may confuse practitioners and clients on the treatment of cooperative apartments as intangible personal property. For example, the New York legislature amended the Tax Law in 2004 to impose an income tax on gains recognized by nonresidents on the disposition of shares of stock in a New York cooperative apartment. (N.Y. Tax Law § 631(b)(2) eff. 1/1/04). This change in the law may lead one to conclude that cooperative apartments are treated as real property in New York. However, to impose a tax on said gains, the legislature did not redefine real property. Instead, it simply expanded its reach on the taxation of income derived from intangible personal property owned by nonresidents.

Similarly, there are provisions within the Internal Revenue Code that may confuse taxpayers on the classification of cooperative apartments as intangible personal property. In 2006, the IRS issued Private Letter Ruling 200631012 stating that stock in a cooperative apartment located in New York constitutes real property for purposes of like-kind exchanges under IRC § 1031.

Bottom line: non-New York residents may consider holding off on selling their New York cooperative apartments and consider like-kind exchanges as a tax efficient alternative.

– Josie Colomar