does the below also hold true for a coop?

Q & A; Assessments Can Affect the Tax Basis

Published: October 1, 2006

Q -- Can regular monthly payments that are made along with common charges but are listed separately under Capital Reserve Fund be used to increase the tax basis for a condominium when calculating capital gains?

A -- Martin M. Appelbaum, a certified public accountant in Manhattan, said assessments levied by a condominium board for capital improvements, whether paid as a lump sum or in monthly increments, can indeed be used to increase the tax basis of individual units, thus reducing the profit when the apartment is sold.

This assumes that the board has complied with Internal Revenue Service guidelines. Mr. Appelbaum said that under I.R.S. regulations affirmed in numerous court decisions, the board must pass a resolution and notify unit owners that the funds being raised will be used for capital improvements only and not for operating expenses or ordinary repairs.

In addition, he said, there should be a separate line item on the monthly bill for the capital assessment. And finally, he said, money collected for the capital assessment should be held in a different account than the one used for other funds collected by the condominium.

"The condo board should consult with its C.P.A. firm to ensure they are following the proper procedure for billing and collection of the funds," Mr. Appelbaum said.

Yes, it holds true. Assessments and general improvements to your apartment add to the original value of the price you paid for your unit and (if the co-op is not your first home that you sold) so, what you get on the sale of the unit is now subtacted to the original price + assessment.

What many times happen is that the IRS provides you a break on the first home that you sell. So, if your profits are not greater than the break you get, you deduct zip.

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If it is a question is Yes. If it is a statement, you have just reaffirmed my explanation. But remember, the IRS give the deducion once. After that, you must declare the profit. So, if you are selling another home that you have owned in a series, then the IRS deduction does not apply; capital improvements become handy to reduce your profit or increase your losses.

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Our 500 unit co-op is forty years old. We have capital improvements every year in accordance with the AICPA required engineering study and capital improvement plan. Our plan says that we need to spend about $15,000,000 over the next fifteen years, in current dollars.

It does not mean we schedule the capital improvement precisely in the year estimated by the engineering study as many year to year maintenance events can prolong the life span of a capital feature.

However, for a number of years we have had a yearly assessment that garners about $1,000 per unit (yes, apportioned by the number of shares), and thus we have an annual capital improvement income stream of $500,000.

In addition our original mortgage was retired without ever refinancing or expanding the principle. In turn, rather than lower the monthly maintenance costs by the like amount, we kept this item in the income stream but change it to capital income and now we use this income for capital improvements. In total, we now accumulate $900,000 a year for capital improvements.

The rationale is that as the building ages, more of the original infrastructure and even some of the newer more recent items need replacement. Thus, we are replacing windows over a six year program without borrowing, we are replacing our central AC (used buy all apartments) chiller devices, we upgraded our lobby, we completely overhauled our elevator systems and cabs, we built a new mailroom, put off street parking decks were completely refurbished, and soon we will replace all wallpaper and carpeting in the hallways of all floors.

The point is that assessments should be a recurring yearly income stream and now sprung on residents as ”specials”. By having assessments as regular yearly event, residents can plan budgets accordingly (in our case) for years to come.

how do cap expenses have to be listed and budgeted to remain deductable when a person sells their apartment? our coop is assessing for "general" purpose of offsetting future expenses without earmarking the assessment for anything.

Essentially, the co-op's auditor should assist in segregating the funds in a separate line item in accou8inting and a separate bank account. Yes, the monthly billing statement should show the assessment as a separate entity.