If you sell your shares in the co-op, you may be able to exclude some or all of the profit realized on the sale, up to $250,000 ($500,000 on joint tax returns). If you can exclude all of the gain, you do not need to report the sale on your tax return; that is, you will not have to pay any taxes on the profit. If some (or all) of the gain cannot be excluded, it is taxable as a capital gain (15% tax rate), and you must report it on Schedule D of IRS Form 1040.
To claim the exclusion, you must meet the ownership and use tests. This means that during the five-year period ending on the date of the sale, you must have:
- Owned the shares in the co-op for at least two (2) years, and
- Lived in the apartment that the shares entitle you to occupy as your main home for at least two (2) years.
If you owned and lived in the property as your main home for less than two years, you can still claim an exclusion in some cases. The maximum amount you will be allowed to exclude will be reduced.
(If you have a capital loss, rather than a gain, unfortunately, you will not be able to claim the loss as a deduction.)
For more information on the home sale exclusion, request Publication 523 (“Selling Your Home”) from the IRS. (See Tax Deductions for information on other tax advantages available to shareholders.)