If you are selling your home in a community association, you may want to take advantage of a possible tax break — your percentage interest in the many improvements that your association has made over the years.
Claiming improvements made by your association could help reduce any other capital gains taxes you may owe when you sell the property.
Your community association has spent a considerable amount of money improving the property. It has added a new roof (or roofs), installed a swimming pool and tot lot, and made other similar improvements.
You own a percentage interest in that association. Generally, (other than for cooperatives) your percentage interest will be found at the end of a legal document known as the “Declaration.” The total of everyone’s percentage 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 $400,000 in improvements from the time you bought the property, and that your percentage interest is 2.3. If you multiply your percentage interest times the total improvements, you get $9,200, and this amount can — and should — be added to your basis as “improvements.”
The IRS says that you will need to know the basis in your home to determine whether you will experience a gain or loss when you sell it (IRS Publication 523, entitled “Selling Your Home”).
Your basis in your home is determined by how you got the home. For example, if you bought or built the property, the basis is what it cost you. If it were a gift, your basis is the same as that of the person giving you the property. And if you inherited the house, you get what is known as stepped-up basis, namely the fair market value as of the date of death.
It is surprising to me that many community association owners are not aware of this tax benefit. 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.
Basis is a concept on 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. Each dollar that can legitimately be added to the purchase price (the adjusted basis) generates a savings to the individual community association owner.
What should you do if you sold your property within the last few years and were not aware of this special tax break?
Obtain a breakdown of capital improvements for the last three years from your association’s property manager. You may be able to file an amended return, but you must discuss the logistics, the practicality and the legality of an amended return with your own tax advisers.
You don’t necessarily want to red-flag the IRS by filing that additional return.
Benny L. Kass is a Washington lawyer. This column is not legal advice and should not be acted upon without obtaining legal counsel. 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.