Owners of co-op apartments who are looking to sell should be advised on the tax rules that could save them money. In part two of this series on condos vs. co-ops, tax guru Julian Block exlains how the law allows these homeowners to increase the basis of their properties.
If you’re just joining us, go back to part one of this series on how ownership of conventional single-family dwellings differs from ownership of condos or co-op apartments.
This article, part two, will focus on how the law allows an owner of a co-op apartment to increase its basis beyond more than just what is spent on capital improvements, as opposed to repairs, within the apartment. It also allows the owner to increase her basis to reflect her share of maintenance charges or special assessments that are spent on improvements for the benefit of all apartments.
Accountants and other tax professionals should keep in mind that they best serve their clients when they alert them to tax rules that are both helpful and harmful, especially in advance of when these clients sell their apartments.
While the tax rules for profits from sales of homes generally are the same whether the properties are single-family dwellings, condos, or co-ops, tax pros who want to keep their clients shouldn’t be complacent. Clients who become aware after the fact of how easily they could have trimmed their taxes had their accountants apprised them of the following tips are likely to dump their advisors.
It’s worth noting that my wife and I acquired our first home, a three-bedroom co-op apartment in a suburb close to New York City, in 1973, and like most owners who are married couples, we decided to own in joint tenancy with right of survivorship, meaning complete title passes entirely to the survivor.
Ways for owners of co-op apartments to build up adjusted basis. From the day my wife and I moved into our co-op, we made sure to build up the original cost basis by as much as legally allowable, so as to reduce our gain on an eventual sale.
In the beginning, our calculations were simple and straightforward. Our cost basis consisted of the purchase price, plus nominal amounts for certain closing costs connected with the apartment’s purchase. These included an attorney’s fee, a lien search to uncover any liens that had been filed against the apartment’s seller, and the filing of an application with the co-op’s board.
Next, we prepared and retained records of what we spent for within-the-apartment capital improvements that added to the property’s value, prolonged its useful life, or adapted it to new uses. Some were big projects, such as replacing kitchen fixtures and enclosing a terrace, while others were small, such as upgrading closets and installing built-in bookcases.
The IRS forbids basis increases for repairs, such as replacing broken windows, fixing leaky faucets, repainting the apartment, or shampooing carpets, regardless of whether these repairs were urgent. All of the adjustments to the original cost basis resulted in what the IRS calls “adjusted basis.”
While a co-op owner can’t claim annual write-offs for what she spends on improvements, she doesn’t permanently forfeit them. The IRS allows an owner to add such expenditures to her apartment’s adjusted basis––the figure it requires her to use to determine gain from a subsequent sale. Consequently, improvements reduce any taxable gain on a subsequent sale.
What’s next. Part three in this series will discuss why co-op owners should scrutinize year-end financial statements and IRS Form 1098 (Mortgage Interest Statement) that the co-op board provides to owners.
Attorney and author Julian Block is frequently quoted in the New York Times, Wall Street Journal, and the Washington Post. He has been cited as “a leading tax professional” (New York Times), an “accomplished writer on taxes...