Housing Cooperative Tax Rules: Deductions, AMT, and Share Sales

If you own shares in a housing cooperative, federal tax law treats you much like a traditional homeowner: under 26 U.S.C. § 216, the housing cooperative tax rules for shareholders let you deduct your proportionate share of the corporation’s mortgage interest and real estate taxes, deduct interest on the loan you took to buy your shares, and exclude capital gain when you sell your unit under the same principal-residence rules that apply to houses.¹ What you cannot deduct is most of what you pay each month, and several caps can shrink the deductions you do get.

Your Share of the Building’s Interest and Property Taxes

The cooperative pays the master mortgage and the real estate taxes on the building. Section 216(a) passes two categories of those payments through to you: real estate taxes the corporation pays on the building and land, and interest on debt the corporation incurred to acquire, build, or maintain the property.¹ Nothing else in your monthly maintenance passes through.

By default, your share equals the number of shares you own divided by the total outstanding stock of the corporation, including shares the corporation holds itself. Own 500 out of 10,000 shares, and you deduct 5 percent of the qualifying interest and taxes. The corporation can elect an alternative allocation that assigns taxes or interest to each unit based on a reasonable measure of actual cost, including a share of common areas. That election has to be made by the corporation and can only be revoked with IRS consent, and it usually shows up in buildings where unit sizes vary widely enough that a straight share ratio would distort things.¹

Management should send you a year-end statement with your allocated interest and taxes. The corporation must file Form 1098 reporting each shareholder’s share of qualifying interest when that amount reaches $600 or more.² Property tax allocations usually come on a separate statement, so check both documents.

Interest on Your Share Loan

Most co-op buyers finance the purchase with a share loan rather than a traditional mortgage, since they’re buying stock rather than real property. The IRS treats cooperative housing stock as a “qualified home” for the mortgage interest deduction, so interest on a loan used to buy the shares is deductible the same way home mortgage interest is.³ This is separate from your share of the building’s master mortgage interest.

Because some jurisdictions or co-op agreements restrict pledging shares as collateral, the loan may technically be unsecured. The IRS still lets you treat the debt as secured by the stock to the extent proceeds were used to buy it.³ The standard debt cap applies: for loans originated after December 15, 2017, interest is deductible only on the first $750,000 of qualified residence debt across your share loan and any other home mortgage combined.

What You Cannot Deduct

Most of what you pay to the cooperative each month is not deductible. Utilities, staff salaries, insurance, management fees, and routine repairs are personal living expenses. If the cooperative leases its land rather than owning it, ground rent is also not deductible, because it is neither a real estate tax nor interest on acquisition debt. Special assessments for capital projects like a new roof or elevator replacement are not deductible in the year you pay them either.

Not deductible does not mean lost. Under Section 216(d), any portion of your payments that is allocable to the corporation’s capital account is added to your adjusted basis in the stock.¹ So does the portion of your monthly maintenance that pays down the master mortgage principal. A higher basis means less taxable gain when you sell. Over a decade or more of ownership, that can reach tens of thousands of dollars, so ask management for an annual breakdown showing how your maintenance was split among operating costs, taxes, interest, and principal, and keep those statements.

Transfer fees, often called flip taxes, follow a similar basis logic. They typically run 1 to 5 percent of the sale price and are not currently deductible.⁴ If you pay one as the seller, it reduces your amount realized and thus your gain. If you pay one as the buyer, it adds to your cost basis in the stock. Either way, the benefit shows up at sale.

Whether Itemizing Actually Helps

Deducting your share of the building’s property taxes only matters if you itemize, and even then, it counts against the state and local tax cap. Under the One Big Beautiful Bill Act, the SALT cap rose from $10,000 to $40,000 for 2025, with a 1 percent annual inflation adjustment, bringing it to $40,400 for 2026. Married taxpayers filing separately have a cap of $20,200. High earners phase down: the cap begins shrinking at a 30 percent rate for taxpayers with income above roughly $505,000, eventually reaching $10,000.⁵

That single cap has to cover your co-op property tax deduction, state income tax (or sales tax if you elect it), and any other local taxes together. In high-tax cities where co-op property taxes can be substantial, the cap still bites. And none of it matters unless your total itemized deductions beat the standard deduction, which for 2026 is $16,100 for single filers, $32,200 for joint filers, and $24,150 for heads of household.⁵ For a shareholder with a modest share loan and moderate taxes, the standard deduction may be the better result. Run the numbers both ways.

AMT Wipes Out the Property Tax Piece

If you land in Alternative Minimum Tax territory, the property tax pass-through disappears. Under Section 56(b)(1)(A), real property taxes described in Section 164(a) are not deductible for AMT purposes.⁶ Mortgage interest generally survives the AMT calculation, so the hit falls on shareholders with large tax pass-throughs in high-tax jurisdictions.

Selling Your Shares

When you sell co-op shares, Section 121 treats the sale as the sale of a principal residence, even though you’re transferring corporate stock. The ownership test looks at how long you held the stock, and the use test looks at how long you lived in the unit you were entitled to occupy as a stockholder. Meet both, and you can exclude up to $250,000 of gain as a single filer or $500,000 on a joint return.⁷

The threshold is owning and using the unit as your primary residence for at least two of the five years before the sale. The two years do not have to be consecutive, so a temporary move-out doesn’t automatically disqualify you if the aggregate time adds up. Keep records of move-in dates and any absences.

If you sell before hitting two years, you may still get a reduced exclusion when the sale is prompted by a change in employment, health, or certain unforeseen circumstances.⁷ The partial exclusion is a fraction of the $250,000 or $500,000 maximum, based on the ratio of time you actually owned and used the unit to the full two-year requirement. Sell after 18 months because of a job move, and a single filer can exclude up to $187,500.

Using the Unit for Business or Rental

If you use your unit for business or to produce rental income, Section 216(c) lets you treat a portion of your stock as depreciable property.¹ The depreciable basis starts with the original cost of the stock plus any capital improvements, and the deduction applies only to the share used for business or income production. Residential rental property is depreciated over 27.5 years using the straight-line method.⁸

There’s a cost at sale. Depreciation you claim, or should have claimed, is recaptured as unrecaptured Section 1250 gain, taxed at a maximum rate of 25 percent. That rate applies regardless of the capital gains bracket you’d otherwise be in, so the eventual tax can be higher than shareholders expect. If you plan to sell within a few years, weigh the annual deduction against the recapture bill.

One Thing That Has to Be True at the Building Level

None of these shareholder benefits exist if the corporation itself doesn’t qualify under Section 216(b). The corporation must have only one class of stock outstanding, every stockholder must be entitled to occupy a dwelling unit solely because of that stock, and the corporation cannot distribute anything to shareholders outside of earnings and profits except in liquidation. The corporation also has to pass one of three annual operating tests, the most common being that at least 80 percent of its gross income comes from tenant-stockholders. Buildings with substantial commercial rent can fail the income test and still qualify under alternative tests based on square footage or expenditures.⁹ If the corporation fails, every resident loses the federal deductions, so it’s worth confirming with management that your building meets the tests each year.

1
Office of the Law Revision Counsel. 26 U.S.C. 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. Publication 936 – Home Mortgage Interest Deduction
4
Internal Revenue Service. Publication 530 – Tax Information for Homeowners
5
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
6
Office of the Law Revision Counsel. 26 U.S.C. 56 – Adjustments in Computing Alternative Minimum Taxable Income
7
Office of the Law Revision Counsel. 26 U.S.C. 121 – Exclusion of Gain From Sale of Principal Residence
8
Internal Revenue Service. Publication 527 – Residential Rental Property
9
Office of the Law Revision Counsel. 26 U.S.C. 216 – Deduction of Taxes, Interest, and Business Depreciation by Cooperative Housing Corporation Tenant-Stockholder