real estate broker claims a portion of condo fees are addition to basis

"Gary Goodman" wrote

I don't have a citation, but it makes sense. If I replace my roof it's an increase to my basis, and that should be regardless of if I'm renting it or not. And if I'm setting back $1000 a year (non-refundable) in pre-payments to the Association for a roof replacement, wouldn't my basis increase by $1000 a year too? The thing that has to be done is a reasonable estimate of the amounts that go toward current costs and those that get set back for future improvements. And that can be reasonably done by the Association.

But you don't get to increase your basis until you actually spend the money to replace the roof. Just setting the money aside, in case you need to replace the roof in the future (a true "rainy day" fund), doesn't increase your basis.

On the other hand, a personal rainy day fund is not normally associated with the home -- if you sell the house, you normally keep the unspent funds. But in the case of a condo, the new owner gets a beneficial ownership of the capital reserves, so it can be seen as an improvement to the property even though it hasn't been spent.

Not all adjustments to basis need be in the form of paid-for physical improvements directly to the property.

I agree that a portion of the HOA dues could be an increase in basis under certain circumstances. If it is true for a rental (as the pub mentioned above states), why not owner-occupied as well? It is similar to certain items on a real property tax bill that add to basis rather than current expense, such as Benefit Assessment Districts (BAD).

Paul,

I see your point, but the only support I've seen is for a special assessment that is specifically earmarked for an improvement. I haven't found anything saying that payments into a reserve are an addition to basis. Money is fungible so how do you separate out the money spent to paint a building or buy new nets for the tennis courts?

-- Gary

On Wednesday, August 22, 2012 10:38:42 AM UTC-4,

Somehow this Real Estate broker (or his/her accountant) is claiming that a Condominium Association is some type of a "pass through" entity similar to a partnership or S-Corporation. I doubt he/she will find any support for that position because there is no basis in law for it (with the possible exception of one provision on energy credits). Why not just ask them for a citation. He/she either has it or they don't.

I agree completely. That's always been my understanding.

___ Stu

I wasn't able to quickly find authority on this either way. But it seems to me that the homeowners association is normally a nonprofit corporation, holding funds in trust for the homeowners. The association doesn't own the money it receives, it holds the money for the benefit of the homeowners. When it spends money, it does that for the benefit of the homeowners. And the homeowners get the tax benefit of money they paid and is spent on their behalf.

___ Stu

The adjusted cost basis to a condo owner is no different than the cost basis for a single family home owner. See IRS Pub 544 for a list of the items that make up adjusted basis. The problem for the condo owner, is identifying the indirect capital improvements. The monthly fees, dues, etc. and/or assessments paid by the owner cover a variety of expenses, not all of which affect cost basis. In order to adjust your basis you need to have the condo association provide a letter to every owner that documents the amount of capital improvements for the year allocated to your condo.

I have personally seen these letters.

Alan, if I understand your message, the HOA has to identify each year the amount spent on capital improvements. That is impossible in this case because a lot of the work is paid from another fund that was created as a result of a legal settlement against the developer. Granted, the $15 million settlement probably won't cover everything, but as I said before, money is fungible. (Estimates to fortify a pier on which several buildings rest range from $6M to $20M.)

Stu, HOAs are not really non-taxable entities. They are taxed but have a choice in calculating the taxable income.

The board meets again soon. I will ask the broker to have her accountant provide a cite. For me to prove the negative of her statement is very difficult so making her prove her statement is a better choice. Also, I think if she finds out she's wrong from somebody else, she'll take it better than if I challenge her. (I'd like to tell her that I'll promise not to sell real estate if she'll promise not to give tax advice.)

Thanks, Gary

I've been looking for an authoritative answer to this question for more than thirty years - *ok, not continuously, you're right* - and have never been able to find anything close to "authority." I would have thought that with the proliferation of homeowner associations and coops and condominiums in the past several decades, someone would have asked this question in the right forum and that we would have an answer. Please let us know what you find out.

You can add to basis what you SPEND on capital improvements. You cam also add to basis what the HOA SPENDS on capital improvements that they allocate to each homeowner. If they don't break it out and allocate it, then there is no adjustment. You can't make an adjustment for payments put into a reserve account. That's equivalent to a deposit. The money has to be spent before you can adjust basis.

But, it's not like a deposit, in that you don't get it back. Suppose owner A pays HOA dues for many years including a capital reserve amount which is not spent during his period of ownership, then sells unit. Does new owner B then get to fully adjust his basis by his portion of the new roof that was paid for right after he moved in, even though that amount was paid for by A? Presumably part of B's purchase price included his share of the HOA's capital reserve account, so it's almost like capitalizing the same thing twice.

If I understand the above quote correctly, this also implies, in the case of a rental condo, that not 100% of the HOA dues are deductible as current expense, nor can the amount not deducted as expense be used as an adjustment to basis -- all under the condition that the HOA breaks our how much of the HOA monthly amount goes into a capital reserve account (e.g. "New Roof"). By so doing, the HOA is declaring that the amount is actually a deposit (which would be neither expensable nor adjustment to basis for a landlord -- how unfortunate).

If the HOA does *not* break out the reserve deposit amount, *then* it is fully deductible to a landlord?

As for the HOA "breaking out and allocating", any condo owner presumably has access to the HOA annual financial statements, these plainly show the allocation (in my experience). So who exactly would *not* have this info? (in other words, the HOA *always* breaks it out).

In Pub 527, as mentioned in the OP, there is a vague allusion to taking depreciation on "special assessments you pay [...] for improvements" in Ch. 4, Condominiums.

I'm certainly no expert, and my opinion is probably worth less than you pay for it, but IRS Publication 523 states "To determine your basis in a condominium apartment used as your home, use the same rules as for any other home". Based on that, I don't see how you can add fees paid to the condo association to your basis, no matter what they are allocated for, until the actual expense occurs.

If, at the time of sale, there is a balance in some condo ass'n account creditable to the particular condo, I would think that should be an additional cost to the buyer (similar to taxes).

Simple case: I own a condo. There's no reserve account for capital improvements when I bought it.

Then they decide they need some capital improvements, and my assessment is $10K, which I pay. This year, they don't spend any money on capital improvements.

I sell the condo. What I'm selling is (1) the condo itself, and (2) my $10K share of the reserve account. My basis in "the stuff I'm selling" is $10K more than my basis in the condo.

Seth

If I pay a contractor for a new roof, that's a capital expense when I pay, even if he hasn't installed the roof yet, right? So if I pay the condo association for a new roof, why wouldn't the same rule apply?

X% of _every_ account is attributable to the owner (albeit the exact balances of each account aren't known on the transaction date). Though that would be the right way to handle it: "You've agreed to pay me $300K for the condo. That's really $290K for the condo itself, and $10K for the unit's $10K share of the Capital Improvements Reserve Account."

I don't know what effect that would have on a bank's willingness to issue a mortgage of a particular "percent of value".

Seth

Do you have a citation for that statement? I don't see any support for that being the case, (at least for a private homeowner, which is the current topic).

What if the contractor doesn't install the roof for five years? What if he goes bankrupt after he has your money?

Are you going to both increase your basis and also claim a casualty loss?

Of course, I never pay contractors in advance, unless I know them well and they need a small advance to cover cost of materials. And they deliver the materials to the site. In which case it would not be a capital expense at the time of delivery -- only during the year of installation.

Exactly. But it seems to me the question in that case would be, if you were an investor, could you depreciate that along with the rest of the basis in the condo?

___ Stu

It's called cash basis accounting. You recognize income and deduction when you actually receive or pay money rather than when it is actually earned.

___ Stu

I understand cash basis accounting. But it is not clear to me that the basis in the house goes up on the date of payment, rather than on the date the improvement is actually accomplished.