Updated Condominium Unit Owner’s Tax Basis Letter (As of June 2015)
Prepared by Park Tower Condos chief auditor, Ralph Picker, CPA, CFE, Managing Member of Picker & Associates, LLC, CPA’s
For income tax purposes, it is important for each unit owner to maintain records to substantiate the cost of their condominium unit. In the event the unit is sold or otherwise disposed of, income tax regulations require that such costs be accumulated and offset against sales proceeds. Unit owners who pay directly or indirectly into the Association’s reserve funds may add their proportionate share of these costs to their income tax basis of their unit, thereby reducing their capital gains, if any. Financial information about fees that have been designated to reserves from owner condominium assessments and fees can be readily available from the Association’s financial statements.
The Internal Revenue Code allows exclusion from income of up to $250,000 of gain realized on the sale or exchange of a personal residence for an unmarried individual and $500,000 for married individuals, if they qualify under certain conditions. The $250,000 and $500,000 exclusion from income reduces the need for many homeowners to keep records of capital improvements that increase the basis of their residence. However, records of capital improvements should be kept if there is any possibility that there would be income recognition form the disposition of the unit or if the unit is fully or partially used for business purposes, since the gain exclusion would not apply to the business use portion of the unit.
Units Used For Business:
Those unit owners who use their unit fully or partially for business may depreciate the amounts that are designated to reserve. Such funds must be used for improvements, replacements, purchase of capital assets, etc.
You will need to multiply your percentage of ownership by the amount of reserve contributions for the period of time you have owned the unit. This computed amount will then represent the amount to add to your tax cost basis.
Your Tax advisor:
The determination as to whether or not the contributions increase the cost of the property rests with the individual unit owner. We suggest that you consult with your tax advisor to inquire about these tax benefits, especially if you use your unit for business purposes. Your advisor can assist you with any adjustments to your unit’s cost basis.