HOA Fees

[Zee]

I recently read a string on another forum. Apparently, an RE agent indicated at an HOA meeting that the portion of monthly dues allocated for capital improvements could be added to the basis of each condominium. The responses were interesting. One person, noted that often the funds are used for purposes other than capital improvements. Further, it was noted the capital improvements included common areas such as the swimming pool, streets, etc. Another. indicated it wouldn't be appropriate to add capital improvements until the funds were expended.

It's an interesting question. I'd like to hear the thoughts of the experts here.

[Roberts]

As I own a condo as a rental unit and attend meetings of the HOA - In 3 years I've yet to see any of our "capital improvements" budget used for anything that would normally be used to increase basis. IMO that's a horrible piece of advice. They call capital improvements what the IRS would call repairs and maintenance.

[Roland Slugg]

That advice may be partly true, but in general it is not. Since the HOA, not the individuals, owns the common area property and improvements, such as the swimming pool, perimeter fence, clubhouse, etc., and the HOA is a separate legal entity, no ownership interest in those assets accrues to the individual homeowners. All they have is a right of use.

However, if any HOA funds are used to pay for, or partially pay for ... i.e. subsidize ... improvements to an individual's own "unit," that cost can be added to the owner's basis. An example would be a new roof.

HOA dues, on the other hand, are fully deductible as a rental expense for rental property covered by a HOA.

[Zee]

More thoughts on HOA fees and basis adjustment

I was hoping for more discussion. Here’s what they say on the NOLO website. You’ll note the example is for a rental condo. Would the suggested treatment of capital items be any different for a condominium used as a personal residence?

I would agree the treatment appears correct. But, it wouldn’t seem to make sense as the realtor has suggested to deduct the monthly amount assessed for capital improvements because there is uncertainty as to when the capital improvement will be made and it isn’t unusual for an HOA to transfer amounts to an Operating fund to cover shortfalls. And, as another poster suggested many HOA’s may not know the difference between a capital improvement and repair.

As such, if this type of advice were followed wouldn’t it require an annual statement from the HOA of the actual amount expended for capital improvements and the allocation method to each condominium since the maintenance fees often vary by size of unit, etc.?

I own a condominium as my primary residence. They assessed and replaced roofs before I purchased. That’s easy to add to the basis. But, unless it’s an individual assessment I wonder how many HOA’s actually provide information to help there member’s adjust their basis?

Any more thoughts?

How to Factor in Capital Improvements Made by a Homeowners' Association

“When you own a condo, there are two types of improvements, the cost of which should be added to your adjusted basis. The first type are improvements you make to your specific unit--for example, you remodel your kitchen or bathroom.
The second type of improvements that you can add to your adjusted basis are capital improvements your homeowners' association makes to the building's common areas--for example, replacing a roof, an elevator, or a central heating and air conditioning system. Your pro rata share of the cost of these improvements should be added to your adjusted basis. Your homeowners' association should be able to tell you how much this is.
Example: Jean owns a home in a 100-unit condominium in Florida that she has rented out for the last ten years. She paid $100,000 for the unit, so that is her starting basis. During the time that Jean owned the unit, she spent $20,000 to remodel the kitchen and bathroom, and replaced the carpets. During the years she rented the condo, she also took $4,000 in depreciation deductions. In the meantime, Jean's homeowners' association spent $3 million to upgrade the property, including installing a swimming pool and replacing the roof. Jean owns a 1% interest in the condominium common areas, so her pro rata share of these improvements is .01 x $3,000,000 = $30,000. Jean adds this to the $20,000 of improvements she made to her own condo, resulting in $50,000 of improvements that she adds to her starting basis. She subtracts the $4,000 in depreciation deductions. Jean's adjusted basis is $136,000. She sells the condo for $200,000. Thus, Jean's taxable profit is $64,000. Had Jean not counted her $30,000 share of improvements made by her homeowner’s association, her taxable profit would have been $94,000.
Note that if you own a stock-cooperative instead of a condominium, you may also add to your adjusted basis your share of the costs to pay down the principal on the building’s mortgage. This does not apply to condo owners because there is no mortgage on the building itself.”

[Nashville]

Review Roland Slugg

Any more thoughts?

I would heavily discount any appelation used by the association to denote "capital improvements", and convert any financial data to what actually happens to your condo, regardless of whether your residence, a rental, or timeshare.

Again, assessments for "improvements" to common property are not owned, and cannot be capitalized. You may own the condo, but you do not own the sidewalks, swimming pool, tennis court, etc. You are not allowed to capitalize any of this, period.

This can be good or bad. The entirety of the HOA fees (except what improves your property) are an EXPENSE. Doesn't matter what the HOA calls it. It's bad if it is your personal residence because it is not a deductible expense on Sch A, nor can it be added to your basis. It's good if you are renting the unit because you are entitled to all the expense and not forced to capitalize any of it.

[Zee]

I would heavily discount any appelation used by the association to denote "capital improvements", and convert any financial data to what actually happens to your condo, regardless of whether your residence, a rental, or timeshare.

Again, assessments for "improvements" to common property are not owned, and cannot be capitalized. You may own the condo, but you do not own the sidewalks, swimming pool, tennis court, etc. You are not allowed to capitalize any of this, period.

This can be good or bad. The entirety of the HOA fees (except what improves your property) are an EXPENSE. Doesn't matter what the HOA calls it. It's bad if it is your personal residence because it is not a deductible expense on Sch A, nor can it be added to your basis. It's good if you are renting the unit because you are entitled to all the expense and not forced to capitalize any of it.

Here are excerpts of a CPA firm’s website that specializes in Homeowner Associations Reserve Studies and accounting. I’m having a hard time agreeing/disagreeing with this. I wonder if it’s been tested in court?

“Contributions owners pay towards their reserve fund increase the tax basis in their home. Only contributions towards CAPITAL projects (no regular maintenance like painting and sealcoating).
• Owners that use the unit as their residence will most likely shield all taxable gain by use of the IRC 121 Exclusion of Gain on Residences ($250K single/$500K MFJ). Therefore significant appreciate of value would have to occur for most residential owners to benefit from tracking this info.
• Owners that work from home and claim a home office deduction could depreciation more basis in their home and realize higher deductions each year.
• Owner that are investors and rent the units will benefit by knowing there is a difference in how their condo fee is to be treated. Investors that currently deduct the entire condo fee (operating and reserve) as an operating expense are in error. Only the operating fee is deductible as a maintenance expense and the capital assessment should be added to basis and depreciated.”

“How the HOA can help Owners

• Provide a clear separation of operating assessments vs. capital assessments to unit owners.

• Separate line items on invoices.
• Year end recap letter detailing allocation of assessments between operating and capital.
• Have your capital assessments based on only capital projects that meet the IRS rules of capital expenditures. “

The website also indicates that those with rental property deducting the entire amount of the HOA fee is incorrect.