Faced with the challenges of ever-increasing real estate taxes and the ongoing need for funds for capital expenditures and working capital, coupled with a reluctance to increase maintenance fees and impose assessments, boards of cooperative housing corporations are always on the look-out for creative ways of generating additional income. Selling underutilized building common areas (such as portions of hallways, lobbies, rear-yard space, rooftop space, basement space, and the like) can be a viable source of such income. Common area space such as corridors, hallways or terraces may be incorporated into an existing apartment. In addition, if certain requirements discussed below are met, shares for commercial or professional spaces may be sold, such as stores and offices. In addition to the income generated by sale of the new shares, issuing new shares will likely make co-op apartments more attractive to potential buyers because the maintenance cost per share is reduced as a result of the increase in the total number of shares outstanding.
Importantly, when such new shares are issued and sold, the revenue received by the co-op is treated as a capital contribution and is not subject to income tax, making it attractive from a tax vantage for co-ops to sell such shares. Private letter rulings issued by the Internal Revenue Service (IRS) confirm that so long as the shares are sold for the exclusive and sole use of the shareholder, amounts paid for the shares will not constitute gross income to the co-op, but instead will be treated as a capital contribution.1
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