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A condominium may not necessarily qualify as a homeowners association under the tax code.
AUTHORMichael Esposito, Shareholder at WilkinGuttenplan
PAGE #p. 43
Boards should have a tax-planning strategy in place; the tax code is specific regarding residential/commercial mix condos.
The Problem. Some condominiums with a mix of residential and commercial space do not qualify as a homeowners association under the tax code. This means that any budget surpluses may be taxed just as they are for a Fortune 500 company, even though your intent was not to generate a profit. What you’re really paying tax on is your own common charges.
The tax code is specific about what kinds of mixed-use condominiums can be considered a homeowners association. The main requirement is that the condo has to be substantially residential, which means that no more than 15 percent of the building’s square footage can be commercial. There are plenty of buildings in New York where the commercial square footage is larger, especially if there is office or professional space over the first few floors.
The Epiphany. Budgeting and tax planning, especially if your condominium is not considered a homeowners association, can help you avoid paying taxes on your own income.
The Execution. You have to be conscious of your budgeting process. The treasurer should review the condo’s monthly budget report and in late summer take stock of it. If it appears that the condo is bringing in extra income that will create a surplus at the end of the year – which will be taxed as profit – the board can consider abating a portion of common charges for the remainder of the year. The board can then determine to assess unit-owners during the abatement period for capital reserves for an amount at the board’s discretion. You have to make it very clear to the unit-owners before you bill them that the funds generated from the assessment will be restricted to capital projects. If you do this, that assessment will not be taxable income to the condo, and the unit-owners get a step-up in basis for their share of the assessment.
The Result. If you stay on top of your condo’s budget throughout the year, you can use tax-planning strategies to ensure that your association will have little or no taxable income.