Is property management for a residential housing cooperative a taxable service to real property in Connecticut?

Plain-English summary

A property management company asked whether the property management services it sells to residential housing cooperatives are subject to Connecticut sales tax. Connecticut taxes services to real property only when the property is commercial, industrial, or income-producing — so at first glance a purely residential co-op might seem exempt.

The Department of Revenue Services ruled that these services are taxable, because a cooperative community qualifies as income-producing real property even though it is residential. The key is who owns what: in a cooperative, the cooperative entity owns the real property, and the residents own interests in the cooperative (which entitle them to occupy a unit). Each member is obligated to pay the cooperative its share of the community's expenses, and those payments are treated as income of the cooperative — regardless of whether the co-op tries to make a profit or pays tax on that income. Because the property is held and used to produce that income, property management services sold to the co-op fall under the taxable category in Conn. Gen. Stat. § 12-407(a)(37)(I).

DRS drew a careful contrast with condominiums, where the individual units are owned by the residents and only the common areas are jointly owned — a different ownership structure with its own separate rules for how far a condo association counts as income-producing. It also flagged two things outside the ruling's core: low- and moderate-income housing is specifically excluded and separately exempt (§ 12-412(29)), and maintenance and janitorial services are taxable for all properties regardless of this analysis.

What this means for you

Property management companies

Don't assume "residential = non-taxable." When you manage a housing cooperative, Connecticut treats the co-op as income-producing real property, so your management fees are taxable services under § 12-407(a)(37)(I). The residential character of the community does not save it, because the co-op itself earns income from members' expense payments. Charge and remit sales tax on co-op management services (and note that maintenance/janitorial services you provide are taxable at any residential property anyway).

Cooperative boards and managers

Expect the property management services your co-op buys to carry Connecticut sales tax. This flows from the co-op ownership structure, not from any decision to operate for profit. If your community is low- or moderate-income housing, a different, more favorable rule may apply (see § 12-412(29)).

Condominium associations (a useful contrast)

This ruling is specifically about cooperatives. Condominiums have a different ownership structure — residents own their units — and Connecticut applies separate rules (Conn. Agencies Regs. § 12-407(2)(i)(I)-1(f)(4)) for when a condo association is treated as income-producing. Don't assume the co-op result automatically carries over to a condo.

Accountants and tax professionals

The analysis turns on the definition of "income-producing real property" (Conn. Agencies Regs. § 12-407(2)(i)(I)-1(f)) applied to the cooperative ownership structure under Connecticut's Common Interest Ownership Act (§ 47-202), reinforced by the federal treatment of co-op assessments as income (I.R.C. § 216). Watch the carve-outs: low/moderate-income housing (§ 12-412(29)) and the always-taxable maintenance/janitorial categories (§ 12-407(a)(37)(X), (Y)).

Common questions

Q: Is property management taxable in Connecticut?
A: Property management is a service to real property, taxable when the property is commercial, industrial, or income-producing. This ruling holds that a housing cooperative is income-producing, so management services sold to it are taxable.

Q: How can a residential co-op be "income-producing"?
A: Because the cooperative entity owns the property and collects members' shares of the community's expenses, which are treated as the cooperative's income — so the property is held and used to produce income even if the co-op isn't run for profit.

Q: Does the same rule apply to condominiums?
A: Not automatically. Condos have a different ownership structure (residents own their units), and Connecticut has separate rules for when a condo association is treated as income-producing.

Q: Are there any exceptions?
A: Yes — low- and moderate-income housing is excluded and separately exempt. Also note that maintenance and janitorial services are taxable at all properties, residential or not, independent of this ruling.

Citations and references

Statutes:

• Conn. Gen. Stat. § 12-407(a)(2) (services taxed only if enumerated)
• Conn. Gen. Stat. § 12-407(a)(37)(I) (services to commercial, industrial, or income-producing real property)
• Conn. Gen. Stat. § 12-407(a)(37)(X), (Y) (maintenance and janitorial services)
• Conn. Gen. Stat. § 12-412(29) (low- and moderate-income housing exemption)
• Conn. Gen. Stat. § 47-202 (cooperative ownership)

Regulations and federal law:

• Conn. Agencies Regs. § 12-407(2)(i)(I)-1(f) (definition of income-producing real property)
• I.R.C. § 216 (treatment of cooperative housing assessments)

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 2017-3

Original ruling text

Ruling 2017-3 - Sales and Use Taxes - Services to Real Property and Cooperatives

FACTS:

A property management company (the “Company”) provides property management services to residential properties, including cooperative communities. [1]

ISSUE:

Are the Company’s sales of property management services to cooperative communities taxable as services to commercial, industrial or income-producing real property under Conn. Gen. Stat. § 12-407(a)(37)(I)? [2]

RULING:

Cooperative communities are income-producing real property, and so the Company’s sales of property management services to a cooperative community are taxable under Conn. Gen. Stat. § 12-407(a)(37)(I).

DISCUSSION:

Sales and use taxes are imposed on the sale of a service only if the service is specifically enumerated as taxable.  Conn. Gen. Stat. § 12-407(a)(2) .  Services to industrial, commercial or income-producing real property are specifically enumerated as subject to sales and use taxes under Conn. Gen. Stat. § 12-407(a)(37)(I) .  These services include property management services. [3] Thus, sales of the Company’s property management services will be subject to sales and use taxes if the cooperative is considered to be industrial, commercial, or income-producing real property. Based upon the facts provided by the Company, the cooperative is entirely residential in nature. The real property may, however, still be considered income-producing.

“Income-producing real property” means real property held for or used in the production of income.  Conn. Agencies Regs. § 12-407(2)(i)(I)-1(f). [4]   In a cooperative community, the cooperative owns the real property.  See Conn. Gen. Stat. § 47-202(12).  The cooperative members (i.e., the residents) do not own the real property, but instead own interests in the cooperative.  See Id .  Each member, by virtue of his or her ownership interest in the cooperative, is entitled to occupy a unit. [5]   See Id .  Also by virtue of his or her ownership interest in the cooperative, each member is obligated to pay the cooperative a share of the cooperative community’s expenses.  See Conn. Gen. Stat. § 47-202(9).  These payments are treated as income of the cooperative, regardless of whether a cooperative endeavors to make a profit or is subject to tax on such income.  See I.R.C. § 216(b)(1)(D)(i) and Treas. Reg. § 1.216-1(e)(4).

Therefore, because a cooperative community produces income, the Company’s sale of property management services to a cooperative community is taxable under Conn. Gen. Stat. § 12-407(a)(37)(I), regardless of the otherwise residential nature of the cooperative community.

LEGAL DIVISION

August 2, 2017

[1] None of the cooperative communities managed by the Company are housing facilities for low and moderate income families, which are specifically excluded from the definition of income-producing property and are also the subject of a specific exemption set forth in Conn. Gen. Stat. § 12-412(29).

[2] The Company represents that it does not perform any maintenance or janitorial services for the cooperative communities, as the sales of such services would be subject to sales and use taxes for all properties. Conn. Gen. Stat. § 12-407(a)(37)(X) and (Y).

[3] Property management services include overseeing the day-to-day operations of real property, providing services such as assisting with budgeting, inspecting the property for maintenance issues or rule infractions, administering service requests by residents, handling purchase orders and contracts for services on behalf of the client, and keeping track of other administrative functions for the client. See Informational Publication 2006(35) , Building Contractors’ Guide to Sales and Use Taxes , “Management,” p. 44.

[4] Conn. Agencies Regs. § 12-407(2)(i)(I)-1(f)(2) provides two exclusions from the definition of “income-producing real property,” neither of which apply to the facts presented.

[5] This ownership structure is different from the ownership structure of a condominium association.  In a condominium association, the units are individually owned by the residents and the common area is jointly owned.  See Conn. Gen. Stat. § 47-200(10).  Specific rules regarding the extent to which a condominium association is treated as income-producing real property are provided in Conn. Agencies Regs. § 12-407(2)(i)(I)-1(f)(4).