Condo Owners: To Reduce Tax at Sale Time, Account for Community Improvements

But what if you live in a condo or other home that's part of an association that owns common areas? You could be eligible to adjust your basis to reflect improvements to those common areas.

Say that in the years since you bought, your community association has spent a considerable amount of money improving the property. It has added a new roof and installed a swimming pool.

You own a percentage interest of that association. Generally, your percentage interest will be found at the end of a legal document known as the declaration. The total of everyone's interest in the association should be 100 percent. In a cooperative, your percentage interest should be reflected on your share certificate or proprietary lease.

Let us assume that the association spent $300,000 on that roof and pool and that your interest is 1.5 percent. If you multiply your percentage interest times the total improvements, you get a figure of $4,500. This amount can -- and should -- be added to your basis as "improvements." In our example, by adding $4,500 to basis, the taxpayer is going to be saving $675 in capital gains tax.

It surprises me that many community association owners are not aware of this tax benefit. Particularly for older homeowners who have watched real estate profit build up over many years and now have profit of more than $500,000, every dollar of capital improvements they can document is valuable. In most community associations, records should be available that show total spending for improvements year by year.

Please understand that maintenance and repair items are not added to the basis, but capital improvements -- generally items that have a useful life of one year or more -- are indeed legitimate items to be added to the basis.

Basis is a concept to which most of us pay little attention. However, as we get older and become concerned with conserving the majority of our assets, the concept of adjusted basis becomes critical.

What if you sold your property in the past few years and were not aware of this tax treatment? You may be able to file an amended return, but you must discuss the logistics and the legality of an amended return with your tax advisers.

Benny L. Kass is a Washington lawyer. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, 1050 17th St. NW, Suite 1100, Washington, D.C. 20036. Readers may also send questions to him at that address or contact him through his Web site, http://www.kmklawyers.com.