Large HOA special assessment for several projects

[abenso3]

Hi-

I've been renting out a condo that I initially bought as my primary residence. Has been rented for 10 yrs.

During 2019, we had large special assessment (almost 16k per owner) which covered roofing replacement, plumbing repairs, stairwell renovation, basement renovation, and masonry. Unit owners had option of paying lump sum without interest, or spreading out over time, with interest. I elected the lump sum payment. Not sure if this should be counted as a one time HOA fee, or whether this is an improvement which then needs to be depreciated over time- and to potentially make matters more complicated, only part of the repairs (the roof) happened in 2019. The rest are being completed in 2020.

Thanks for any help!

[Critter]

You will deduct it like any normal HOA fee paid in the year you paid it.   

A part of your reg HOA fees is applied to the reserves normally and as such deductible annually.   The fact that you had a shortfall you had to come up with all at once doesn't change that fact.  And I think the HOA needs to take a hard look as to why the reserves where not sufficient to handle at least the foreseeable repairs like at least  the roof and why no one noticed/anticipated  the other needed repairs earlier so they could be saved for... lack of a healthy reserve may be signs of a deeper issue.

[abenso3]

Thank you for that clarification.

Yes, your observations are  spot on as it relates to the size of the special assessment and its reflection of other issues...suffice to say that this is the result of kicking the can down the road for too many years. But anyway, one last question. Should I enter this special assessment on my Schedule E as its own separate misc expense, or should I bake it into my regular assessments which is considered a management expense?

Thanks.

[Critter]

Either way is correct ... your choice.

[Carl]

which covered roofing replacement, plumbing repairs, stairwell renovation, basement renovation, and masonry.

All of that clearly and undeniably meets the IRS definition of a property improvement. (Definition below).  This adds to your cost basis of the property. No question about it. So the entire amount gets entered in the Assets/Depreciation section. Classified it as residential rental property and it gets depreciated over the next 27.5 years.

Property Improvement.

Property improvements are expenses you incur that add value to the property. Expenses for this are entered in the Assets/Depreciation section and depreciated over time. Property improvements can be done at any time after your initial purchase of the property. It does not matter if it was your residence or a rental at the time of the improvement. It still adds value to the property.

To be classified as a property improvement, two criteria must be met:

1) The improvement must become "a material part of" the property. For example, remodeling the bathroom, new cabinets or appliances in the kitchen. New carpet. Replacing that old Central Air unit.

2) The improvement must add "real" value to the property. In other words, when  the property is appraised by a qualified, certified, licensed property appraiser, he will appraise it at a higher value, than he would have without the improvements.

[Critter]

@Carl

I will disagree because this is property is not owned by the individual ... the HOA owns it as it part of  the common area.  The part of the HOA fee that  usually goes to the reserves is deductible so this  is just an HOA fee expense just like any other monthly/annual HOA fee is deducted.  

[Carl]

I will disagree because this is property is not owned by the individual

Yes the individual does own it, along with all the other individual condo owners who were assessed the same amount for the same reason/purpose. From what the OP says, the HOA has clearly and undeniably identified this as a special assessment, as well as what the assessment is specifically for.

IRS Publication 527 at https://www.irs.gov/pub/irs-pdf/p527.pdf page 8 specifically states:

Assessments for local improvements.

Assessments for items which tend to increase the value of property, such as streets and side-walks, must be added to the basis of the property. For example, if your city installs curbing on the street in front of your house, and assesses you and your neighbors for its cost, you must add the assessment to the basis of your property.

[Critter]

@DoninGA 

@Hal_Al 

@tagteam 

@opus 

@Anonymous 

@SteamTrain 

Can you weigh in on this thread ? 

[abenso3]

Thanks for offering your opinion, which obviously differed from the original answer.

For what its worth, I know in my original description of the work being done I used the term "renovation," when in fact, it could just as easily all be considered maintenance and repairs. All of the projects that are meant to be completed by the money raised were thing that the HOA could have (and incidentally should have) been taking care of over the course of many years, but in an effort to keep monthly HOA fees artificially low (which makes any individual unit more appealing when put up for sale), they put off several repairs and what would otherwise be reasonably considered maintenance, until we had simply reached a tipping point.  For most owners in the building, they elected to have their portion of the cost spread out over 8 years, along with interest, and baked into their monthly HOA dues. I elected to take care of it in lump sum to avoid the interest.

Additionally, the HOA took out a loan to cover these expenses (which is being paid off by the increased HOA dues for those who elected to spread it out), and for what its worth, if the HOA defaults, the liability goes to the association, not to any individual owner, which suggests to me that the common elements are indeed owned by the association, NOT by any one indivdual owner or collection of individual owners. . I'm curious -Does that change your opinion on how this should be handled?

[Carl]

Thanks for offering your opinion

It's not an opinion. It's a fact that the work done meets the IRS requirements of a property improvement.

Property Improvement.

Property improvements are expenses you incur that add value to the property.

To be classified as a property improvement, two criteria must be met:

1) The improvement must become "a material part of" the property. For example, remodeling the bathroom, new cabinets or appliances in the kitchen. New carpet. Replacing that old Central Air unit.

2) The improvement must add "real" value to the property. In other words, when  the property is appraised by a qualified, certified, licensed property appraiser, he will appraise it at a higher value, than he would have without the improvements.

[PK84]

We sold our rental condo Nov. 2019 and had to pay an HOA Special Assessment of ~$33,000 at closing (all condo owners were assessed the same amount). The renovation encompassed 3 water systems that serve the building:

1. Hot and cold domestic water pipes
2. Sewer and waste pipes
3. Heating and air-conditioning (HVAC) pipes

Can we expense the $33K? 

[Mike9241]

it could be treated as a selling expense or added to the cost basis of condo.  

[paulk1201]

Thank you