Cooperative Housing Tax Rules for Tenant-Stockholders

Cooperative housing tax rules for tenant-stockholders let you deduct your proportionate share of the building’s real estate taxes and mortgage interest, treat capital assessments as additions to your stock basis, depreciate the unit when it is used for rental or business, and exclude up to $250,000 of gain ($500,000 for joint filers) when you sell your shares. These benefits come from Internal Revenue Code Section 216 and generally track the rules for traditional homeowners. The catch is that both the corporation and you have to qualify, and the cooperative structure introduces a few wrinkles that a house owner never has to think about.

Who Has to Qualify Before You Can Deduct Anything

Two things must line up. The corporation has to meet the federal definition of a cooperative housing corporation, and you have to meet the definition of a tenant-stockholder. If either side fails, the Section 216 deductions disappear for that year.

What the Corporation Must Do

The corporation must have a single class of stock outstanding, and each stockholder’s right to occupy a specific unit must flow from owning that stock rather than from a separate lease. The corporation cannot distribute money to stockholders except out of earnings and profits, or upon liquidation.

It also has to pass at least one of three financial tests for the tax year:

At least 80 percent of gross income comes from tenant-stockholders (income test).
At least 80 percent of the building’s total square footage is used or available for residential use by tenant-stockholders (square footage test).
At least 90 percent of expenditures go toward acquiring, constructing, managing, or maintaining property for the benefit of tenant-stockholders (expenditure test).

Any one is enough.¹ A building with sizable commercial tenants might fail the income test but still clear the square footage test if residential space dominates.

What You Must Be

You must own fully paid-up stock in the corporation, and your holdings must bear a reasonable relationship to the value of the unit you occupy relative to the corporation’s total equity. Your right to live in the unit has to come from that stock.¹

What Happens if the Corporation Fails a Test

Because “tenant-stockholder” is defined as someone holding stock in a qualifying cooperative housing corporation, a year in which the corporation fails all three financial tests is a year in which no one in the building can claim the Section 216 deductions.¹ If your board is weighing a big lease to commercial tenants or non-stockholder occupants, that revenue can push the corporation across the income test threshold.

What You Can Deduct Each Year

Two categories of the corporation’s expenses pass through to you: real estate taxes on the building and land, and mortgage interest on the corporation’s debt. Nothing else in your monthly maintenance qualifies. Utilities, management fees, insurance, doorman salaries, and reserve fund contributions are personal living expenses when the unit is your residence, and they are not deductible.¹

Your Proportionate Share

Your proportionate share is the ratio of your shares to the corporation’s total outstanding stock, including any shares the corporation holds itself. Own 150 of 15,000 outstanding shares and your share is one percent, so you deduct one percent of the corporation’s qualifying taxes and mortgage interest paid that year.¹

The cooperative sends an annual statement with the dollar amounts allocated to your unit. When the mortgage interest allocable to your shares reaches $600 or more, the corporation also reports it to the IRS on Form 1098.² You claim these amounts on Schedule A of Form 1040, so they only help you if you itemize.

The SALT Cap on Real Estate Taxes

Your share of the cooperative’s real estate taxes counts toward the state and local tax deduction cap. For 2026, the SALT cap is $40,400 for single and joint filers and $20,200 for married filing separately, with one percent annual increases through 2029. High earners face a phase-down: the cap is reduced by 30 percent of the amount by which modified adjusted gross income exceeds $505,000 (joint), but it cannot fall below $10,000 ($5,000 for married filing separately).³ Your cooperative real estate taxes combine with your state income taxes and other state and local taxes against this single cap. In high-tax areas that ceiling often bites.

Mortgage Interest Limits

The cooperative’s mortgage interest is deductible as home mortgage interest, but the standard homeowner debt ceilings apply. For debt incurred after December 15, 2017, interest is deductible on up to $750,000 of acquisition indebtedness ($375,000 if married filing separately). Older debt carries the prior $1 million limit.⁴ The ceiling covers the combined total of your proportionate share of the corporation’s mortgage and any personal loan you took out to buy your shares. If those two together exceed $750,000, the interest deduction is reduced proportionately.

Interest on a Personal Share Loan

Many buyers finance their purchase with a personal loan secured by their stock. That interest can qualify as deductible home mortgage interest, because cooperative stock is treated as a qualified home when it entitles you to occupy a unit. Where state law or the cooperative’s own rules prevent formal pledging of the stock, the IRS still allows the debt to be treated as secured by the stock to the extent the loan proceeds were used to buy it.⁴ The instrument still has to make your ownership interest security for payment and allow the home to satisfy the debt on default.

Assessments and Principal Paydowns Adjust Your Basis

Special assessments for major building improvements — roof replacements, elevator overhauls, plumbing upgrades — are not currently deductible. They are treated as contributions to the corporation’s capital, and you add what you paid to the cost basis of your stock.⁵ A higher basis means a smaller taxable gain when you eventually sell. Keep records of every assessment; the cooperative’s annual financials are not always explicit about which charges are operating expenses and which are capital contributions.

The same treatment applies to the portion of your regular monthly charges that the corporation allocates to paying down mortgage principal. Those payments reduce corporate debt and increase equity, so your basis rises accordingly. Over a long holding period these adjustments add up.

Depreciation if You Rent the Unit or Use It for Business

Under Section 216(c), you can treat the allocable portion of your stock as depreciable property when the unit is used as a rental or for business.¹ Depreciable basis includes not just what you paid for the stock but also your proportionate share of the corporation’s mortgage debt at the time you convert the unit to income-producing use, because that debt is part of your economic investment in the underlying real estate.

You use the straight-line method over 27.5 years for residential rental property.⁶ For a home office in your primary residence, only the square footage used exclusively for business qualifies. Depreciation begins on the date the unit is placed in service.

Passive Loss Limits on Rental Units

Rental income from a cooperative unit is generally passive, and net rental losses cannot offset wages or other nonpassive income. The main exception is a special allowance of up to $25,000 in rental losses for taxpayers who actively participate in managing the rental, meaning they make real decisions about tenants, lease terms, and spending rather than delegating everything to a management company.⁷

The $25,000 allowance phases out as modified adjusted gross income rises above $100,000 and vanishes at $150,000. Married couples filing separately who lived together at any point during the year cannot use it. You also must own at least 10 percent of the interest in the rental activity. Unused losses carry forward and can offset later passive income or be released when you dispose of the activity.⁷

Depreciation Recapture at Sale

Depreciation you claimed comes back as taxable income when you sell. The IRS uses the higher of the amount allowed or allowable, so failing to claim it does not spare you from recapture.⁸ Recaptured gain on real property is taxed at a maximum rate of 25 percent, above the long-term capital gains rate that applies to the rest of the profit. If you used the simplified method for a home office deduction, depreciation is treated as zero and your basis is not reduced.

When You Sell Your Shares

A sale of cooperative shares is treated as a sale of a principal residence for capital gains purposes. Under Section 121, single filers can exclude up to $250,000 of gain and joint filers up to $500,000 if the ownership and use tests are met. For a cooperative, the ownership test applies to your stock and the use test applies to the apartment you were entitled to occupy. You must have owned the stock and used the apartment as your primary residence for at least two of the five years before the sale.⁹

Building Your Basis

Start with what you paid for the stock, including down payment and borrowed funds.¹⁰ Add capital assessments for building improvements and the portion of the corporation’s mortgage principal paid down during your ownership. Subtract any depreciation taken or allowable for business use. These adjustments accumulate across your entire holding period, and the cooperative’s annual financial reports are the primary source for tracking principal paydowns and capital expenditures.

Partial Exclusion for Early Sales

If you sell before hitting two years, you may still qualify for a reduced exclusion when the sale is prompted by a change in employment, a health issue, or unforeseen circumstances. The reduced amount is a fraction of the full $250,000 or $500,000, based on the time you actually owned and used the unit divided by two years.⁹

Losses on a Personal Residence Are Not Deductible

Sell the shares at a loss and the unit was your personal residence, and the loss is not deductible. The IRS treats a loss on personal-use property as a nondeductible personal loss regardless of size.¹¹ If the unit was rental or business property, losses on sale are deductible, subject to passive activity rules.

Gains Above the Exclusion and the NIIT

Gain above the $250,000 or $500,000 exclusion is taxed at the applicable long-term capital gains rate, which tops out at 20 percent for the highest brackets. Most sellers pay 15 percent.¹² A 3.8 percent net investment income tax may also apply to the taxable portion of the gain when modified adjusted gross income exceeds $250,000 (joint), $200,000 (single), or $125,000 (married filing separately). The Section 121 exclusion shields the excluded portion from NIIT as well, but any gain above the exclusion that flows into net investment income is subject to the extra tax.¹³ These thresholds are not indexed for inflation.

Reporting the Sale

The person responsible for closing the transaction files Form 1099-S reporting the gross proceeds, and you should receive a copy; cooperative stock is a reportable interest for 1099-S purposes.¹⁴ You report the sale on Form 8949 and carry the totals to Schedule D of Form 1040.¹⁵ Even if the entire gain fits within the exclusion, you still report the transaction when you received a 1099-S, showing the excluded gain so the numbers reconcile with the IRS’s records.

1
Office of the Law Revision Counsel. 26 USC 216 – Deduction of Taxes, Interest, and Business Depreciation by Cooperative Housing Corporation Tenant-Stockholder
2
Internal Revenue Service. Instructions for Form 1098
3
Internal Revenue Service. Topic No. 503 – Deductible Taxes
4
Internal Revenue Service. Publication 936 – Home Mortgage Interest Deduction
5
Internal Revenue Service. Private Letter Ruling 202614001
6
Internal Revenue Service. Publication 527, Residential Rental Property
7
Internal Revenue Service. Publication 925, Passive Activity and At-Risk Rules
8
Internal Revenue Service. Depreciation and Recapture
9
Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence
10
Internal Revenue Service. Publication 523, Selling Your Home
11
Internal Revenue Service. Capital Gains, Losses, and Sale of Home
12
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
13
Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
14
Internal Revenue Service. Instructions for Form 1099-S
15
Internal Revenue Service. Instructions for Form 8949