How to I treat Rental Condo Captial Reserve association fees - add to Depreciated Cost Basis or as an Expense

[ytischler]

I own and rent a condo that is part of an association.  The association manages all capital improvements as needed and charges me a monthly Capital Reserve fee that usually totals less than $1,000/year to fund these planned improvement projects.  Do I add the annual amount to the Depreciation schedule as an increase in cost basis and depreciation over 27.5 years, or because it is below a $ threshold, just expense the total in the current tax year? 

[Anonymous_ · Accepted solution]

You are going to have to capitalize the assessment (depreciate over the recovery period) since (a) it is specifically set aside for improvements and (b) the assessment has not been spent during the tax year.

If the fee ($1,000) had been spent during the tax year on some sort of tangible personal property, then you might have been able to get away with deducting it as an expense, but not given these facts.

[ytischler]

A follow-up on your comment about not spending it in current year.  Each year the association creates a list of capital projects funded from the built-up reserve fund, so there is actual spending each year, but the monthly capital reserve is not meant to pay for in-year spending but to build a reserve designed to keep the expected future capital needs (20 year horizon) funded at 70%.  Does this change how I treat the capital reserve payments?

[Anonymous_]

It will not change if the funds are spent on actual improvements (I presume for the common areas).

This would be different if the funds were spent on repairs and maintenance (in which case your share could be deducted as an expense).

[ytischler]

thx. 

The Capital Reserve funds a pool to pay for major updates/improvements to both common area property as well as my unit.

Repairs and Maintenance is a separate association fee that I expense.

[Carl]

You may need to check the HOA bylaws. I doubt the entire amount you are charged each month is solely for future capital improvements. Unless you are already doing the math and know the percentage of your monthly fee that goes to capital improvements.

I point this out because my son used to own a condo where the monthly HOA fees for something like $150/mo.  Per the bylaws, 30% of collected fees were for future capital improvements, and the remaining 70% was for continuing maintenance/repairs/utility costs of common areas. Doing the math he only claimed $105/mo for HOA dues, and the remaining $45/mo which came to 540/year just "sat there" in limbo with the intention of claiming it either when a capital improvement was done, or when the property the sold.

He sold the property after a few years, and just added the accumulated 4-5 years of money paid into the capital improvement fund to the land value since the funds were never actually spent for capital improvements while he owned it, and you can't depreciate land anyway, or any other improvement until it's actually done and placed in service. At least, that was the reasoning used by his CPA back in 2012-13 when he sold the property.

[Anonymous_]

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@Carl wrote:

You may need to check the HOA bylaws. I doubt the entire amount you are charged each month is solely for future capital improvements.

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@ytischler was referring to the fees for a reserve fund for improvements, @Carl, not the total HOA fees.

@ytischler stated:

The Capital Reserve funds a pool to pay for major updates/improvements to both common area property as well as my unit.

Repairs and Maintenance is a separate association fee that I expense.