DC City Council Passes New Co-op Taxation Regulations (well, almost)**

**see DC Coops update below…

If you live in DC and believe in stimulating an especially satiated sector of the Washington DC real estate market, you now have the right to be slightly embittered. The DC City Council has passed a new co-op transfer tax that is set to go into effect on October 1 of this year. For a little background – ownership rights of condos and coops, although seemingly identical, do differ. When “buying” a unit in a coop, you are actually “buying stock” in the building. Sounds a little scary and that’s what keeps/kept many buyers away from coops. But the “stock” is “ownership interest” in your unit. Again, very similar to condo living and rights…but there were definitely some financial advantages when it came to purchasing.

Because you were purchasing “ownership interest” (hence treated like “stock”), your purchase was classified as personal property ownership. Benefits? Because the transaction was not defined as a transfer of real estate, the parties were exempt from having to pay transfer or recordation taxes that are standard with the purchase or sale of condos, townhomes, rowhouses, single family homes, etc.

Under this new tax, however, a coop has an “economic interest” tax (you got me!?), requires the standard transfer tax imposed on “ownership interests in real estate” – that is a 1.1% tax on residential properties sales that are less than $400,000, while sales of more than $400,000 will be taxed at a 1.45% rate. The recordation fee is the same amount and will also apply to all coop transactions.

Is This Stimulous?
One has to wonder about the timeliness of such a tax . Could this be penny wise and pound foolish ? After all, the economy is still struggling to get moving and the real estate market is still sluggish. With its “forgiving” taxation regulations on co-ops, DC was able to draw in buyers who were interested in taking advantage of keeping their costs down. With the changes that are set to take place in October, however, buyers might not consider a co-op transaction in DC to be such a good deal anymore.

I have a wild idea, instead of cutting incentives that could greatly help lower both DC condos and co-op absortion rate, couldn’t we increase taxes cigarettes. Maybe give a few more tickets out to DC cab drivers who I think sometimes try to drive you off the road on purpose.

Of course, one could argue that the buyer of a DC co-op may not be deterred by this additional tax. On a $400,000 purchase, for example, the taxes would be $5,800 at the 1.45% rate. A savvy seller, however, would be wise to drop the price to $399,999, as this price would qualify for the 1.1% tax and would cost about $4,400. Dropping the price by one dollar is certainly worth a $1,400 tax savings! Therefore, once the new tax system is put in place, sellers and real estate agents should be sure to consider the value of the property and the resulting taxes when trying to determine the asking price as well as the price they are willing to negotiate down to.

**(Note: As of the time of this blog submission, the new tax was not totally a sure thing. Although it is in a budget bill passed by the DC Council, the total budget has not yet been approved…So, we’re in a “wait and see” mode on this one. The fact that this proposal has gotten this far, however, would certainly suggest that we can look forward to coops being taxed like other residential properties …. sooner or later..