SPECIAL ASSESSMENTS

[Arturo]

All owners of our condo complex were assessed $55,000/unit, in 2019, for needed repairs due to dry rot of the building.  Can this assessment be 'expensed' or does it have to be depreciated? Previous answers to this question are outdated because the depreciation rules were changed after those responses were submitted.

[DavidD66]

I would say that it would have to be capitalized, but that is a guess based on very limited information.  If the dry rot existed when you purchased your condo, you definitely would have to capitalize the costs since they were incurred to fix a material defect in the property that existed before you purchased the property.  If this was not the case, it could be repairs and be expensed, but that would depend on multiple factors.  Perhaps the condo association could engage a local CPA to give all of you guidance how to treat the assessment.

[Arturo]

Thanks for your response and your suggestion  I'll contact the Manager and see if hewill consult with a CPA.  

Even if I were able to expense the repairs I think I would be limited to 10,000 under the new rules.  If you have an opinion on that I would appreciate your response.

[Critter]

Unless you rent out this condo unit the cost is capitalized .... there is nowhere in the tax code you can expense this as a personal residence. 

[Carl]

All owners of our condo complex were assessed $55,000/unit, in 2019, for needed repairs due to dry rot of the building.

As I see it, the IRS would consider this a property improvement hands down with no question or second thought, because it very clearly meets the IRS definition of a property improvement. Therefore it adds to the cost basis of the property. This is actually more beneficial "in the long run" tax-wise. Were it treated as a tax, then due to SALT limits you would basically "lose out" totally and forever on the amount of *ALL* SALT taxes paid in excess of $10K (unless this is a rental property reported on SCH E)

But still, there is no way on this green earth that a $50K repair expense will make one iota of difference to your taxes, since rental property already operates at a loss every single year, on paper when you do your taxes.

If you claimed it as a rental property repair expense, I can practically guarantee you an audit. Claiming a $50K repair expense on a rental property is like hanging a sign out that reads, "HEY! IRS! AUDIT ME NOW! PLEASE! HURRY! QUICK! I WANT TO PAY LOTS OF FINES AND PENALTIES!"

So its a property improvement. If the condo is a rental, you will "NOT" enter it as a property improvement until "AFTER" the work is completed and the "new" work is actually placed "in service" as a rental asset. It doesn't matter if you pay the $50K in 2019 and work is not completed "for your specific unit" until 2020. You will not be able to capitalize it until you do your 2020 taxes next year.

Here's the IRS definition of a property improvement.

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.

[Arturo]

I should have been more clear.  It is a rental that I purchased several years ago

[Carl]

It is a rental that I purchased several years ago

Then my response applies one hundred percent. There is no doubt this is a property improvement that adds value to the property. You can't call it a tax, since it's levied by the HOA or Condo Association, which is not a taxing authority.

When it comes treating it as a tax, it falls into one of those really "grey" areas that the IRS really doesn't provide clarity on. The word I use to describe this grey area is "ambiguous". One person can define it one way, and you can define it another. The problem is, both of you are right, and both of you are wrong. It's just to "ambiguous". So stay away from the "tax" aspect of this and go with property improvement. Besides, it's better for you in the long run when you sell the property since it increases your cost-basis by a cool $55K.