Tax Basis Additions

By: Howard A. Goldklang, CPA and S. Gail Moore, CPA
Goldklang Group, CPAs, P.C.

When you sell your home you may be faced with a taxable gain.  A gain or loss on your home is determined by the selling price less the adjusted cost basis in the home.  Improvements to your property will increase the basis in your home.

For condominium owners and homeowner association members, increases in basis may occur in two ways:

  1. Any specific improvement to your unit. Examples might be installing hardwood floors or renovating/upgrading a kitchen.
  2. Improvements that the condominium and homeowner associations make to the overall property. Examples might be roof replacement; alterations or additions to the property such as adding a tennis court or a playground.  The key is that it is a capital replacement or improvement that adds to the life of the asset, and it has a life greater than one year.  If the expenditure meets the appropriate requirements then the unit owner can add their percentage interest portion to their basis thereby reducing their potential profit in the sale of their unit.As an alternative to using expenditures, an association could advise its owners that they might be able to add to their basis their percentage interest in the annual contribution to replacement reserves from their operating budget.  This would be appropriate where the Association has a capital replacement reserve fund based on a prepared reserve study.  As long as the contribution to the fund is capital in nature, the unit owner can add their percentage interest in the annual contribution to basis.

It must be remembered that any contributions related to an operating reserve or a contingency reserve and any contribution made for maintenance items (i.e. painting) must be eliminated from the allocation and would not increase basis.  If expenditures are made from replacement reserves for items that are not capital in nature, then the contribution would be reduced by that amount.  For example, if the budgeted contribution was $300,000 but a $50,000 painting project was funded from replacement reserves, then the net contribution eligible for basis increase would be $250,000 times the unit’s percentage interest.