If you are
selling your home in a community association, have you taken advantage of every
possible tax break? Did you include your percentage interest in the many
improvements which your association has made over the years?
Let's compare
these two situation. You purchased your single family house many years ago for
$100,000. Over the years, you have spent $50,000 in improvements and have the
bills to document this. This increases your basis for tax purposes to $150,000.
You sell the property for $650,000. Your profit (excluding for this discussion
sales commissions and settlement costs) is $500,000. Currently, under Federal
law, if you are married, file a joint income tax return, and have owned and
lived in the house for two out of the five years before sale, you can exclude
up to $500,000 of your gain; accordingly, in our example, you will not have to
pay any capital gains tax. If you are single - or file a separate tax return -
you can exclude up to $250,000 of your profit. The difference - $250,000 - will
be taxed. Keep in mind that as of this year, the capital gains tax rate has
been increased, and many homeowners will have to pay up to twenty percent of a
portion of their gain.
Now let us
change this example to the sale of a condominium, cooperative or a house in a
homeowner association. Same facts: you bought for $100,000 and sold for
$650,000. Since the IRS will consider your profit at $550,000, even if you are
eligible for the up-to-$500,000 exclusion of gain, you will have to pay capital
gains tax on the $50,000 overage.
However, there
are "secret" benefits you probably overlooked - or were not even
aware of: the improvements made by your association including the qualifying
energy efficiency improvements added to the complex.
According to
the Internal Revenue Service "You need to know your basis in your home to
determine any gain or loss when you sell it. Your basis in your home is
determined by how you got the home.. (IRS Publication 523, entitled
"Selling Your Home").
For example, if
you bought or built the property, your basis is what it cost you. If it was a
gift, your basis is the basis of the person giving you the property. And if you
inherited the house, your basis will most likely be the fair market value as of
the date of death, called the stepped-up basis.
Let us define
some important terms:
·
Gain.Also known as
"profit," and the gain on the sale of your home is the amount
realized minus the adjusted basis of the home you sold.
·
Amount
Realized.This is the selling price of your old home minus your
selling expenses. These would include real estate commissions, advertising fees
and legal fees incurred exclusively in the selling process.
·
Adjusted Basis.This is your
basis in the property increased or decreased by such expenses as settlement
fees or the costs of additions and improvements that have been made to your
property.
Thus, as can be
seen, in order to reduce your gain, (and pay less tax), you want to
legitimately increase both your basis and your selling expenses.
Let 's go back
to our example. We have agreed that you have made a profit of $550,000 and will
have to pay capital gains tax on that additional $50,000.
Your community
association has spent a considerable amount of money improving the property.
They have 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%. 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 multiple your percentage
interest times the total improvements, you get a figure of $9,200.00, and this
amount can -- and should -- be added to your basis as "improvements."
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.
Reprinted with the
permission of the author
Author: Benny L. Kass,
Realty Times
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