Many of our clients ask us this question. A co-op is a cooperative, a company, with shareholders and a Board of Directors. In effect, you don’t buy an apartment, you buy shares in the cooperative. Cooperatives tend to be less expensive than condominiums because a) most buildings in New York are co-ops and b) co-ops often have many rules regarding who can buy and how it can be used. International buyers that are considering a co-op apartment should take the following factors into account:
Most cooperatives do not allow corporate ownership, so you cannot buy in your company’s name. As a result, the owner is exposed to both the higher capital gains tax (30%) when the apartment is sold in the future and the US Inheritance tax (46%). It is for these reasons that we advise our clients to set up an LLC, which inherently means a cooperative is out of the question.
Cooperatives have strict rules regarding subletting. Some don’t allow it at all, whereas others allow up to 2 out of 5 years. Moreover, the prospective tenant needs to be approved by the Board of Directors. Since the apartment will be in your personal name, you need to make sure you have the correct liability insurance too.
Cooperatives have strict rules regarding financing. Some don’t allow it at all, whereas others allow up to 75% of the purchase price. Note that for foreign buyers, it will be unlikely to obtain more than 60% financing anyway.
CO-OP YES OR NO?
Based on the arguments above buying a cooperative will only make sense for those who pay US taxes or if the property will be used as a pied-a-terre.
INVESTMENT PROPERTY: NO
PIED A TERRE: MAYBE
PRIMARY RESIDENCE: YES