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

[Gary Goodman]

Last night at a homeowner's meeting a real estate broker let loose
with a claim that the accountants she knows say that if the monthly
condo assessments broke out the portion that was earmarked for
addition to the association's capital reserves then owners could use
that as additional basis. She does own several condos that are rented
out, but her advice was aimed at owner/occupants.

I've thought about asking her to get onw of these accountants to
provide a cite, but want doubt that with her ego she would comply.

My question: How do I disprove this? So far, the only mention I've
found is on discussion boards that are filled with "tax experts" who
lack any training or experience with taxes other than using Turbo Tax.
Even so, no verification for either side.

Publication 527 mentions the possibility, but that publication is
about rental properties so I would expect the IRS to lean toward a
position that would slow down the deductible expenses (depreciation
over 27.5 years instead of expensing the HOA fees.)

Any help?

Thanks,
Gary

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[paulthomascpa]

"Gary Goodman" <gar...@gmail.com> wrote

> Last night at a homeowner's meeting a real estate broker let loose
> with a claim that the accountants she knows say that if the monthly
> condo assessments broke out the portion that was earmarked for
> addition to the association's capital reserves then owners could use
> that as additional basis. She does own several condos that are rented
> out, but her advice was aimed at owner/occupants.
>
> I've thought about asking her to get onw of these accountants to
> provide a cite, but want doubt that with her ego she would comply.
>
> My question: How do I disprove this? So far, the only mention I've
> found is on discussion boards that are filled with "tax experts" who
> lack any training or experience with taxes other than using Turbo Tax.
> Even so, no verification for either side.
>
> Publication 527 mentions the possibility, but that publication is
> about rental properties so I would expect the IRS to lean toward a
> position that would slow down the deductible expenses (depreciation
> over 27.5 years instead of expensing the HOA fees.)
>
> Any help?

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.




--
Paul Thomas, CPA
www.paulthomascpa.com
Watkinsville, Georgia

[Barry Margolin]

In article <68qdnUy1OaMTeqnN...@giganews.com>,

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.

--
Barry Margolin
Arlington, MA

[Mark Bole]

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).

--

Mark Bole, EA
Enrolled Agents - America's Tax Experts
http://markboletax.com

[Gary Goodman]

On Aug 22, 10:07�am, "paulthomascpa" <paulthomascp...@bellsouth.net>
wrote:

> - Show quoted text -
>
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

[brian...@verizon.net]

On Wednesday, August 22, 2012 10:38:42 AM UTC-4,
>
>
> > "Gary Goodman" . . . wrote

>
> > > Last night at a homeowner's meeting a real estate broker let loose
>
> > > with a claim that the accountants she knows say that if the monthly
>
> > > condo assessments broke out the portion that was earmarked for
>
> > > addition to the association's capital reserves then owners could use
>
> > > that as additional basis. She does own several condos that are rented
>
> > > out, but her advice was aimed at owner/occupants.
>
> > >
>
> > > I've thought about asking her to get onw of these accountants to
>
> > > provide a cite, but want doubt that with her ego she would comply.
>
> > >
>
> > > My question: How do I disprove this? So far, the only mention I've
>
> > > found is on discussion boards that are filled with "tax experts" who
>
> > > lack any training or experience with taxes other than using Turbo Tax.
>
> > > Even so, no verification for either side.
>
> > >
>
> > > Publication 527 mentions the possibility, but that publication is
>
> > > about rental properties so I would expect the IRS to lean toward a
>
> > > position that would slow down the deductible expenses (depreciation
>
> > > over 27.5 years instead of expensing the HOA fees.)
>
> > >
>
> > > Any help?
>
> >
>
> >
>

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.

[Stuart A. Bronstein]

Mark Bole <ma...@pacbell.net> wrote:

> 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).

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

___
Stu
http://DownToEarthLawyer.com

[Stuart A. Bronstein]

brian...@verizon.net wrote:

> 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 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
http://DownToEarthLawyer.com

[Alan]

On 8/22/12 7:46 AM, Gary Goodman wrote:
> Last night at a homeowner's meeting a real estate broker let loose
> with a claim that the accountants she knows say that if the monthly
> condo assessments broke out the portion that was earmarked for
> addition to the association's capital reserves then owners could use
> that as additional basis. She does own several condos that are rented
> out, but her advice was aimed at owner/occupants.
>
> I've thought about asking her to get onw of these accountants to
> provide a cite, but want doubt that with her ego she would comply.
>
> My question: How do I disprove this? So far, the only mention I've
> found is on discussion boards that are filled with "tax experts" who
> lack any training or experience with taxes other than using Turbo Tax.
> Even so, no verification for either side.
>
> Publication 527 mentions the possibility, but that publication is
> about rental properties so I would expect the IRS to lean toward a
> position that would slow down the deductible expenses (depreciation
> over 27.5 years instead of expensing the HOA fees.)
>
> Any help?
>
> Thanks,
> Gary
>

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
http://taxtopics.net

[Gary Goodman]

> --
> - Show quoted text -

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

[lotax]

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.

[Alan]

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.

--
Alan
http://taxtopics.net

[Mark Bole]

On 2012/08/23 12:16, Alan wrote:

> 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.
>

[Comments made in the spirit of learning and working through the
details, as I certainly don't have the authoritative answer]

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.

--

Mark Bole, EA
Enrolled Agents - America's Tax Experts
http://markboletax.com

[Ron Rosenfeld]

On Wed, 22 Aug 2012 09:46:30 EDT, Gary Goodman <gar...@gmail.com> wrote:

>Publication 527 mentions the possibility, but that publication is
>about rental properties so I would expect the IRS to lean toward a
>position that would slow down the deductible expenses (depreciation
>over 27.5 years instead of expensing the HOA fees.)

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).

[Seth]

In article <k15vhd$dgi$1...@dont-email.me>,

Alan <temp...@vacationmail.com> wrote:

>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.

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

[Seth]

In article <giid38h3ouue2bak5...@4ax.com>,

Ron Rosenfeld <r...@nospam.net> wrote:

>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 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?

>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).

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

[Ron Rosenfeld]

On Fri, 24 Aug 2012 04:14:19 EDT, se...@panix.com (Seth) wrote:

>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?

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.

[Stuart A. Bronstein]

se...@panix.com (Seth) wrote:

> 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.

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
http://DownToEarthLawyer.com

[Stuart A. Bronstein]

Ron Rosenfeld <r...@nospam.net> wrote:
> se...@panix.com (Seth) wrote:
>
>>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?
>
> 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).

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
http://DownToEarthLawyer.com

[Ron Rosenfeld]

On Fri, 24 Aug 2012 10:50:57 EDT, "Stuart A. Bronstein" <spam...@lexregia.com> wrote:

>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.

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.

[Stuart A. Bronstein]

Ron Rosenfeld <r...@nospam.net> wrote:
> "Stuart A. Bronstein" <spam...@lexregia.com> wrote:
>
>>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.
>
> 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.

Let's say you own a condo that you rent out. You get property and
casualty insurance on the condo. Can you deduct the insurance
premium even if the insurance company doesn't pay out anything for
your losses or damage?

Paying dues to an HOA that go into a deferred capital maintenance
fund, it seems to me, is in the nature of insurance. It's not the
same as setting up a separate account in your own name that you plan
to use for that purpose but in reality can use it for anything you
want.

___
Stu
http://DownToEarthLawyer.com

[Alan]

Sorry, Mark, I never should have included the words "and/or
assessments". I am only discussing the monthly HOA fees that cover a
variety of expenditures. I don't believe an owner can on their own
devise a method to allocate the spending found in an annual report. You
have to have a consistent method used by all owners. The association
should provide that break out.

--
Alan
http://taxtopics.net

[Stuart A. Bronstein]

Alan <temp...@vacationmail.com> wrote:

>> 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.
>>
> Sorry, Mark, I never should have included the words "and/or
> assessments". I am only discussing the monthly HOA fees that
> cover a variety of expenditures. I don't believe an owner can on
> their own devise a method to allocate the spending found in an
> annual report. You have to have a consistent method used by all
> owners. The association should provide that break out.

I don't see why the annual financial statements wouldn't work. Each
condo owner pays a specified percentage of all HOA dues, so they
should be allocated that percentage of each type of expenditure.

___
Stu
http://DownToEarthLawyer.com

[Barry Margolin]

In article <4e8f3891td95093bf...@4ax.com>,

Ron Rosenfeld <r...@nospam.net> wrote:

> On Fri, 24 Aug 2012 10:50:57 EDT, "Stuart A. Bronstein"
> <spam...@lexregia.com> wrote:
>
> >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.
>
> 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.

Completing the improvement increases the VALUE of the house, but why
should that be a requirement for increasing the BASIS?

--
Barry Margolin
Arlington, MA

[Ron Rosenfeld]

On Fri, 24 Aug 2012 12:24:57 EDT, "Stuart A. Bronstein" <spam...@lexregia.com> wrote:

>Ron Rosenfeld <r...@nospam.net> wrote:
>> "Stuart A. Bronstein" <spam...@lexregia.com> wrote:
>>
>>>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.
>>
>> 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.
>
>Let's say you own a condo that you rent out. You get property and
>casualty insurance on the condo. Can you deduct the insurance
>premium even if the insurance company doesn't pay out anything for
>your losses or damage?

These are expenses.

>
>Paying dues to an HOA that go into a deferred capital maintenance
>fund, it seems to me, is in the nature of insurance. It's not the
>same as setting up a separate account in your own name that you plan
>to use for that purpose but in reality can use it for anything you
>want.
>

I agree it is in the nature of insurance, but since it is going towards an improvement, it does not count as an expense. Rather it becomes a depreciable item. The IRS says you can start depreciating after the item is **placed in service** (ready and available for its specific use). I doubt a capital improvement fund would meet that definition.

[Ron Rosenfeld]

On Fri, 24 Aug 2012 12:24:57 EDT, "Stuart A. Bronstein" <spam...@lexregia.com> wrote:

>Ron Rosenfeld <r...@nospam.net> wrote:
>> "Stuart A. Bronstein" <spam...@lexregia.com> wrote:
>>
>>>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.
>>
>> 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.
>
>Let's say you own a condo that you rent out. You get property and
>casualty insurance on the condo. Can you deduct the insurance
>premium even if the insurance company doesn't pay out anything for
>your losses or damage?
>
>Paying dues to an HOA that go into a deferred capital maintenance
>fund, it seems to me, is in the nature of insurance. It's not the
>same as setting up a separate account in your own name that you plan
>to use for that purpose but in reality can use it for anything you
>want.
>
>___
>Stu
>http://DownToEarthLawyer.com

To expand on my previous answer:

With regard to the insurance premium, only the amount for one year's insurance is deductible (each year).

With regard to basis, there is a mention in the IRS publication on Residential Rental Properties, with regard to condominiums, indicating that "special assessments" for improvements may be recoverable by depreciation, so presumeably, that share of the particular fund would be added to the basis of the condominium in the event of sale.

I don't know if the IRS differentiates "special assessments" from an annual statement as to the percent of the condo fees that go into a roof replacement fund.

[Ron Rosenfeld]

On Fri, 24 Aug 2012 16:36:26 EDT, Barry Margolin <bar...@alum.mit.edu> wrote:

>Completing the improvement increases the VALUE of the house, but why
>should that be a requirement for increasing the BASIS?

The only analogy I can come up with is in the depreciation rules, which speak to depreciation (which is based on the value of the property), beginning after items are "placed in service".

[Ron Rosenfeld]

On Fri, 24 Aug 2012 16:36:26 EDT, Barry Margolin <bar...@alum.mit.edu> wrote:

>In article <4e8f3891td95093bf...@4ax.com>,
> Ron Rosenfeld <r...@nospam.net> wrote:
>
>> On Fri, 24 Aug 2012 10:50:57 EDT, "Stuart A. Bronstein"
>> <spam...@lexregia.com> wrote:
>>
>> >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.
>>
>> 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.
>
>Completing the improvement increases the VALUE of the house, but why
>should that be a requirement for increasing the BASIS?
>
>--

Expanding on my previous, there does seem to be a special mention regarding condominium rental properties where money going for a "special assessment" for improvements cannot be expensed and may be depreciable. So perhaps that applies in the event of a non-rented sold condo? Assuming the monies were defined as a "special assessment"?

[Seth]

In article <XnsA0B94E1A13FC5s...@130.133.4.11>,

Stuart A. Bronstein <spam...@lexregia.com> wrote:

>se...@panix.com (Seth) wrote:

>> 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.
>
>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?

I don't think cash is depreciable :-)

But when the condo spends it on a new roof, it's depreciable as
roof-life property; or when the condo spends it on a fire alarm
system, it's depreciable as fire-alarm-system-life property.

Seth