Question

Large HOA special assessment for several projects

Forum|Forum|6 years ago
March 29, 2020
2 replies
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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!

Not A Product Question

Critter

Employee

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.

A

abenso3Author

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

Employee

Either way is correct ... your choice.

Carl11_2

Employee

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

Employee

@Carl11_2

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.

Carl11_2

Employee

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.