Pros and Cons of Co-op Living: Co-op vs Condo vs Renting

Living in a co-op can mean a lower entry price in some markets, a say in how your building is run, and possibly a tax deduction for your share of the building's mortgage interest and real estate taxes, if the co-op qualifies and you itemize. It can also mean a board that must approve you, a mortgage you share with every neighbor, tighter financing, resale fees and a building where one owner's unpaid bills become everyone's problem. Whether the trade is worth it depends on the building and on how you plan to use the home.

This guide sets out both sides, compares a co-op with a condo and with renting, and explains the federal tax deduction using the statute and the IRS's own publication. It is general information, not advice: a co-op's own documents decide what applies to a given building, and a lawyer and a tax professional can answer questions about your situation. For the basic structure, start with what is a co-op apartment.

What you are choosing between

In a co-op you do not buy a deed. A corporation owns the building and land, you buy shares in it, and a proprietary lease gives you the right to live in one apartment. The University of Wisconsin Center for Cooperatives describes the member's holding as two things combined: an ownership interest in the cooperative corporation, and an exclusive right to occupy a particular unit that the corporation owns, represented by an occupancy agreement.

In a condominium you own the unit itself and a share of the common property, and you finance it with an ordinary mortgage. When you rent, you own nothing in the building and pay a landlord. The two comparisons below keep to three columns each.

For a fuller side-by-side, read housing cooperative vs condo.

The pros

A share in running the building. Co-op members each own a share, and together they own the cooperative, which owns the building, land and common areas. Members set the bylaws and elect a board from among themselves. If you want a voice in the budget, the rules and the choice of manager, a co-op gives you one that a condo owner or a renter may not have in the same way.

Shared costs at cost. The monthly charge is a pro-rata share of the cooperative's budgeted costs. The University of Wisconsin Center for Cooperatives lists the kinds of costs that can be included: taxes, mortgage payments, repairs and maintenance. Because a co-op does not run to make a profit for outside owners, the charge reflects costs rather than a landlord's margin. That does not make it low. The charge is whatever the building's costs require, and it covers items a condo owner pays separately.

A different way to finance the building. The same source notes that members have no personal liability on the cooperative's blanket mortgage and need not individually qualify for it, since the corporation is responsible for paying off blanket loans. A member who borrows to buy the share is individually liable for that share loan.

Possible tax deductions. Section 216 of the Internal Revenue Code lets a qualifying tenant-stockholder deduct a share of the corporation's real estate taxes and interest. The conditions are covered in detail below.

Possible entry price. In some markets co-ops sell for less than comparable condos, partly because financing and approval are harder and the buyer pool is narrower. That is a pattern in some places, not a rule everywhere. Compare recent sales in the same area.

Affordable-housing versions. Some co-ops are limited-equity or government-regulated and cap the resale price or the buyer's income so the home stays affordable. See HDFC co-ops and Mitchell-Lama co-ops in New York.

The cons

Board approval. In most market-rate co-ops the board decides who can buy. Boards usually ask for financial information, and many interview applicants. That adds time and uncertainty to a purchase, and a refusal may come with no reason given. Fair housing law limits what a board may base a decision on. See co-op board approval process.

A shared underlying mortgage. If the corporation borrowed against the building, every member's monthly charge helps pay it. A member does not sign that loan, but a member's charge rises or falls with it. When the loan comes due, the corporation must refinance or pay it off, and the cost passes to members through the budget or an assessment. Ask what the underlying mortgage balance is, what rate it carries and when it matures.

Tighter financing. A co-op is financed with a share loan, secured by your shares and lease, and not every lender makes them. The lender may also look at the cooperative itself. Some co-ops limit how much a member may borrow. See co-op share loans and co-op mortgages. Check lender availability for the specific building before you fall for an apartment.

Resale fees and rules. Many buildings charge a flip tax when a member sells. Some co-ops cap the resale price, restrict who may buy, or limit subletting. The pool of buyers can be narrower than for a condo, because buyers must qualify with the board as well as the lender.

Building-wide risk. In a co-op the financial health of the corporation is part of what you own. Minnesota's statute on senior housing cooperative offering documents shows what that state's legislature considers worth disclosing: it requires a statement of the effect on members if the cooperative fails to pay real estate taxes or payments due the holder of a security interest, and a resale disclosure certificate that shows reserve balances, expenditures approved but not yet assessed, unsatisfied judgments and pending lawsuits. Even in a state with no such rule, those are the items to ask for. A building with thin reserves or unpaid obligations can pass the cost to members through higher charges or special assessments.

Limits on how you use the home. The proprietary lease and house rules govern subletting, renovations, pets and more. They bind you for as long as you own the shares. Read the documents before you buy, and do not assume what a neighboring building allows applies here.

Not real estate in the usual sense. Minnesota's statute requires a purchase agreement to acknowledge that a membership interest is personal property and not an interest in real estate. The treatment of shares can matter for financing, estate planning and what happens if the corporation has a problem. A lawyer who knows co-ops can explain how this works where you live.

Side by side

Tax: what section 216 and IRS Publication 530 say

A co-op owner is generally treated like a homeowner for part of the tax code. The rule is in section 216 of the Internal Revenue Code, and the IRS explains it in Publication 530, "Tax Information for Homeowners."

What the statute allows. Under 26 U.S.C. 216(a), a tenant-stockholder may deduct amounts paid or accrued to a cooperative housing corporation within the taxable year, but only to the extent those amounts represent the tenant-stockholder's proportionate share of two things: the real estate taxes allowable as a deduction to the corporation on the building and the land, and the interest allowable as a deduction to the corporation on its debt contracted to acquire, construct, alter, rehabilitate or maintain the building, or to acquire the land.

The corporation must qualify. Section 216(b)(1) defines a "cooperative housing corporation" as a corporation that has one and only one class of stock outstanding; each stockholder of which is entitled, solely by reason of owning stock, to occupy a house or apartment in a building owned or leased by the corporation; no stockholder of which is entitled to receive any distribution not out of earnings and profits except on a complete or partial liquidation; and which meets one or more of three tests for the year: 80 percent or more of its gross income comes from tenant-stockholders, or at all times 80 percent or more of its total square footage is used or available for use by tenant-stockholders for residential or ancillary purposes, or 90 percent or more of its expenditures are for the acquisition, construction, management, maintenance or care of its property for the benefit of the tenant-stockholders. Publication 530 lists the same conditions.

The stockholder must qualify. Section 216(b)(2) defines a "tenant-stockholder" as a stockholder in a cooperative housing corporation whose stock is fully paid up in an amount not less than an amount shown to the satisfaction of the Secretary as bearing a reasonable relationship to the portion of the value of the corporation's equity in the building and land that is attributable to the apartment the person is entitled to occupy.

What counts as your share. Under section 216(b)(3), your proportionate share is generally the proportion your stock bears to all outstanding stock. If the corporation elects it, and each dwelling unit is separately allocated a share of taxes or interest that reasonably reflects the cost attributable to the unit, the allocation applies instead.

Limits. Section 216(d) disallows a deduction for amounts paid to the corporation, above the proportionate share of taxes and interest, to the extent they are properly allocable to amounts chargeable to the corporation's capital account. The stockholder's adjusted basis in the stock rises by the amount disallowed.

What the IRS says. Publication 530 says that if you own a cooperative apartment you generally receive the same tax treatment as other homeowners, and that you can deduct your share of the corporation's deductible real estate taxes if the corporation meets the conditions above. It also says you can usually treat interest on a loan taken out to buy stock in a cooperative housing corporation as home mortgage interest if you own a cooperative apartment and the corporation meets those conditions, and that you can treat your share of the corporation's deductible mortgage interest as home mortgage interest. It adds that you must reduce the mortgage interest deduction by your share of any cash portion of a patronage dividend the cooperative receives, and that a Form 1098 from the cooperative should show only the amount you can deduct.

What this means in practice: whether a deduction is available to you depends on the building's status for the year, your own return and whether you itemize. Ask the co-op whether it meets the section 216 tests and how it reports your share, and ask a tax professional how it applies to you.

Who tends to do well in a co-op, and who may not

Co-op living tends to suit people who:

• plan to stay long enough for the transaction costs to spread out;
• are comfortable with the board reviewing their finances;
• want a voice in how the building is run, and are willing to read a budget;
• have confirmed financing for the specific building.

It may suit you less if you:

• expect to move or sublet within a few years;
• need to sell quickly, since approval and financing narrow the pool;
• do not want your neighbors' finances to affect yours;
• want full freedom over renovations and use.

None of these is a verdict. A well-run co-op with strong reserves and clear rules can suit a short-term owner, and a poorly run condo can be worse than a co-op.

What to check before you commit

1. The documents. Read the proprietary lease, bylaws, house rules and any offering plan, and the most recent financial statements.
2. The budget and reserves. Look at the annual budget, the reserve balance and any planned major repairs. See what has been assessed in recent years.
3. The underlying mortgage. Ask for the balance, rate and maturity date.
4. The flip tax and resale rules. Ask whether a flip tax applies, who pays it, and whether the resale price or buyer is limited.
5. Subletting and use rules. Confirm what the lease allows.
6. Lender availability. Ask which lenders have made share loans in the building.
7. Insurance. The building insures the structure, but members normally insure their belongings, interior improvements and liability. See cooperative insurance.
8. Section 216 status. Ask whether the corporation meets the tests and how it reports deductible amounts.
9. Board process. Ask what the application involves and how long it usually takes.

Frequently Asked Questions

What are the main pros of living in a co-op?

A voice in running the building, monthly costs shared at cost, no personal liability on the building's blanket mortgage, possible tax deductions for a share of the corporation's real estate taxes and interest, and in some markets a lower entry price than a comparable condo. Affordable co-ops can also keep homes within reach by capping resale.

What are the main cons of living in a co-op?

Board approval of buyers, a mortgage shared by all members, tighter financing, resale fees such as a flip tax, limits on subletting and use, and exposure to the building's overall finances. A neighbor's unpaid charges or a building's thin reserves can raise costs for everyone.

Is a co-op cheaper than a condo?

In some markets co-ops sell for less than comparable condos, but that is not universal. Monthly charges can be higher because they cover items that a condo owner pays separately. Compare both the price and the monthly cost for specific buildings.

Can I deduct my co-op payments on my taxes?

Section 216 of the Internal Revenue Code allows a tenant-stockholder of a qualifying cooperative housing corporation to deduct a proportionate share of the corporation's real estate taxes and qualifying interest. The corporation and the stockholder must each meet the statute's conditions, and IRS Publication 530 explains how it treats the amounts. A tax professional can say what applies to you.

Does the board have to approve me?

In most market-rate co-ops the board approves buyers, as set by the building's documents. Federal fair housing law limits the grounds a board may use. See co-op board approval process.

What is a flip tax?

A fee charged by the co-op when a member sells, set by the building's rules. See flip tax.

Is it harder to get a loan for a co-op?

It can be. A co-op is financed with a share loan secured by the shares and lease, and not every lender offers one. See co-op share loans.

What happens if other owners do not pay their charges?

The co-op's budget has to be met, so a shortfall can lead the board to raise charges, draw on reserves or levy a special assessment, depending on the documents and state law. Ask for the reserve balance, the history of assessments and any delinquency disclosures the building will give you.

Which is better for me, a co-op or a condo?

It depends on the building and your plans. A co-op can suit someone who wants a voice in the building and plans to stay; a condo can suit someone who wants fewer approval steps and more flexibility. Compare the documents and numbers for specific buildings.

Where to go next

• Housing cooperative vs condo
• What is a co-op apartment?
• The proprietary lease
• Co-op board approval process
• Flip tax in a co-op
• Co-op share loans and co-op mortgages
• Senior housing cooperatives
• Housing cooperatives: the full guide
• How to join a housing cooperative