When it comes to major construction projects at condominiums, what can the board of a community association do on its own and when does it need the advice and consent of the membership?
For instance, can a condo board opt, for security reasons, to build a wall around the premises without the members’ approval?
The answer can be found in the association’s legal documents, usually in its bylaws. In general, there are two provisions: One is called “Maintenance and Repair” and the other is “Additions, Alterations or Improvements.”
For the first, the board generally has full authority to “maintain, repair and replace” the common areas of the property regardless of cost, although in a very few associations there is a dollar cap, above which the board needs the approval of a majority of the owners.
Additions, alterations or improvements, however, usually impose a financial limit on the board’s authority, and the members must approve any work over that dollar cap.
That’s the technical and legal definition. The problem is determining what is maintenance and what is an improvement. Take this real-life example: A cooperative association in the District had a very old phone system — one in which an operator answered all incoming calls and then literally plugged the caller into the appropriate apartment’s house phone. Some of us older folks may remember Judy Holliday as Ella Peterson, telephone operator, in “Bells are Ringing.”
After many years, the cooperative’s phone system failed. The board arranged to pay and install a different system. The board based its decision on “maintenance and repair” and did not seek members’ approval. A member filed a lawsuit, claiming this was an improvement that needed the vote of a majority of owners. The D.C. Superior Court upheld the board’s decision. According to the court, while the new system clearly was an “improvement” since it was impossible to replace the old one, this was, in effect, merely a “repair” of the existing system.
In a 1999 Ohio case, the court provided an interesting definition: An “alteration or improvement involves the change of things from one form or state to another, where maintenance contemplates the restoration of a thing to its original condition.”
Unfortunately, the court cases are inconsistent. I have read cases with identical facts in which one judge called it an improvement and another said it was maintenance. Even the Internal Revenue Service has struggled with these definitions, but you can get guidance from Publication 523, “Selling Your Home” (free online at irs.gov ). According to the IRS, you cannot claim anything as an improvement if, when installed, it has a life expectancy of less than one year.
In addition to determining whether the board needs membership approval, there is yet another reason it is important to determine in which category the work falls: If it is an improvement, association owners may be able to claim their percentage ownership interest in the amount for income tax purposes.
If you bought your condo unit many years ago, it may have increased significantly. Your association has spent a considerable amount of money improving the property — maybe it added a new roof (or roofs), installed a swimming pool or made similar improvements.
You own a percentage interest of the community association. Let us assume the association spent $300,000 in improvements from the time you bought the property, and that your percentage interest is 1.5. If you multiply your interest times the total improvements, you get $4,500, and this amount could be added to your basis as “improvements.” Confirm this with your own tax advisers.
It is surprising to me that many community association owners are not aware of this tax benefit. This is especially helpful for the elderly owner who is selling his or her last property, and does not want to have to pay a lot of tax on the gain that was made. Remember, if the gain is more than $500,000 (if you file a joint tax return) or $250,000 (for single filers), you have to pay capital gains tax on the overage.
In most community associations, the records should be available as to the total expenditure for improvements on a year-to-year basis. Please understand that maintenance and repair items are not added to basis, but capital improvements — generally items which have a useful life of one year or more — are indeed legitimate items to be added to basis.
As far as the wall around the condo is concerned, such a project would be considered an addition, alteration and improvement, requiring membership approval. Why? You did not have a wall before and now you do.
Benny L. Kass is a Washington and Maryland lawyer. This column is not legal advice and should not be acted upon without obtaining legal counsel. Send questions to firstname.lastname@example.org.