Category Archives: Taxes

Tax Implications of Converting Fire Damaged Condo to Investment Property

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(Editor’s Note – J.S. originally wrote to us in January of 2013. You can read the original post at http://askmistercondo.com/reduced-common-fees-after-a-fire/)

J.S. from Pennsylvania writes:

Dear Mister Condo,

Thank you for your explanation on the condo fees from my previous post. Here is an update. It has been 15 months since the condo fire in Wyncote, PA and very little has been done in the building of the 55-unit condominium building. They have secured a builder and architect and if all goes well, the new 55-unit condo building could be completed late 2014 or early 2015.  I am happy to report that I will not be moving back there. Once my condo is rebuilt I will sell it and now consider it as an investment property.

In spite of that, my monthly condo fees are still being paid faithfully on schedule. For many of the other residents who had insurance, their policies that covered their living expenses for 12 months after the fire ran out, leaving them with nowhere to go.  Several of the former owners have filed for bankruptcy and those who haven’t or who are unable to pay their condo fees since the fire are going to lose their condos to the Condo board. It is a very sad situation.

There were several condo units owned by investors who used them as rental units. I am aware that after losing their condos to the fire the investors can claim the entire loss year after year (including the monthly condo fees) for income tax purposes.  My question to you is this: Is there any tax relief that the rest of us can receive?  I was able to claim the loss of my condo on last year’s taxes but since it isn’t my primary residence anymore can I claim the loss of use and condo fees each year until it is rebuilt and sold? What about my neighbors who are still paying condo fees? Is there any income tax relief credit available to us? No one seems to know. I appreciate any information that you can give.

Mister Condo replies:

J.S., what you are describing is truly a horrific situation and I would encourage all unit owners affected to seek whatever legal remedy they can. It strikes me as appalling that unit owners who have already lost their homes are now also losing their investment in the form of bankruptcy.

As for your specific tax question, I had to turn to an accounting friend as I am not a CPA or remotely qualified to answer such a technical tax-based question: “The facts and circumstances you are describing beg many more clarifying questions to create a list of possible outcomes than we could answer here at “Ask Mister Condo”.  Our experts recommend to you that it is indeed time to seek the solid advice of a professional that can work through these possibilities with you and provide you with the best possible personalized solution.”

I couldn’t agree more, J.S.. I am sorry that you are not returning to your condo but, under the circumstances, who could blame you? You can find a directory of qualified CPAs online at the Pennsylvania Institute of Certified Public Accountants. They have a search form at http://www.picpa.org/Content/42910.aspx where you can enter your region and the type of specialist you are seeking. I entered “Tax – Real Estate” without specifying a county and came up with more than 400 names! Enter your county and narrow down those results for your needs. All the best to you, J.S..

How to Handle Tax on HOA Reserve Fund Interest

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Anonymous from New Haven County writes:

Dear Mister Condo,

Federal tax law specifies that Reserve funds and operating expenses cannot be co-mingled.  Does that apply even when we don’t make enough in interest income?

Mister Condo replies:

I know better than to tackle an accounting question without checking in with one of my expert friends. I reached out to my friend Sam Tomasetti, CPA of Tomasetti, Kulas & Company, P.C. for his advice. Here’s what he had to say:

Except for very unusual circumstances, tax law requires that interest income earned on funds held by qualifying homeowners associations be subject to tax no matter how much or little income is earned.  However, tax law also allows a 100% statutory exemption and the ability to offset the cost of earning income with the income. Simply stated the tax is calculated on net income not gross income.

I hope that helps! All the best!

Condo Interest Tax Filing Query

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A.B. from New Haven County writes:

Dear Mister Condo,

If our 6 unit condo does not have enough interest income to require us to pay taxes, do we still have to file?

Mister Condo replies:

A.B., not having to pay taxes does not exclude one from having to file taxes. That being said, I assume your association as a non-profit corporation does, in fact, file a tax statement every year. Completing the interest income portion of that statement with your non-qualifying amount of interest really shouldn’t be that much of a big deal to your tax preparer. As you know, there can be penalties for not reporting interest income and you certainly wouldn’t want to incur a penalty on such a small amount of income. Best wishes!

Property Tax Exemptions for 55+ Community Members?

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J.B. from Hartford County writes:

Dear Mister Condo,

Hello! I am wondering whether you know of any states or towns (in the country) offer or require a property tax exemption for 55+ communities that do not receive municipal services, such as trash pick-up. Thank you, J.B.

Mister Condo replies:

J.B., hello to you as well! Property tax exemptions are a bit unusual because most times the original developer of the community was the one who accepted the city or town’s terms for developing the condo community. Most municipalities look at condominiums as High Density Housing (HDH) developments which put a potential burden on the community’s general services. So even if things like road maintenance, lighting, and trash removal are not provided, services like police, fire and rescue, and more are provided. Sure, the municipality comes out ahead on some measures but short on others. The end result is that many municipalities simply tax the unit owners within the community the same as every other property owner in town. That being said, I know of some communities here in our state that have successfully negotiated to have their municipality handle their trash removal. They still plow their own roads in the winter and maintain their own streetlights but at least they’re getting the same trash removal as all other taxpayers.

The biggest issue I hear about from 55+ communities is having their property taxes used for education. They argue that they and their children are past the age of school so why should they be taxed for something they’ll never use. This is especially true for retirees who move into a new community where they nor their children or grandchildren have sued the local schools. Sun City in Arizona is the only community I am aware of that has specifically given a tax exemption to 55+ communities for education services. And they did this through an unusual move where the communities removed themselves from the school district.

There is a great website on the subject at http://www.55places.com/. In particular, take a look at this article – http://www.55places.com/blog/10-great-low-tax-retirement-communities. Sorry to say that Connecticut did not make that list. Maybe, next time!

Another Taxing Question for Mister Condo

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A.C. from Fairfield County writes:

Dear Mister Condo,

Are management companies allowed to charge a sales tax on the monthly management fee? For example, we agreed on a $25/unit, but are being charge $25+tax/unit.

Mister Condo replies:

A.C., this is the second property management fee tax question I’ve had this week! The answer is it depends on who occupies the unit. Condo units that are rented out are considered commercial property and, as such, management services offered to those units are taxable. Condo units that are owner-occupied are not considered commercial property so the management fee is not taxable in the eyes of the state at this time. However, if a management company is collecting the tax and forwarding that tax to the state, it is unlikely that the state would correct them. It would be incumbent upon the management company to keep track of which units are rentals and charge the association the correct fee and tax based on the number of rentals. It is a tricky proposition. You can read more about it at the Connecticut Department of Revenue Services website by downloading their pamphlet at http://www.ct.gov/drs/lib/drs/publications/pubsip/2006/ip06-35.pdf. In particular, read Page 20 of this book and you’ll see a very clear explanation. All the best!

Clarification on Property Management Fee Tax on Condo Unit

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D.P. from Hartford County writes:

Dear Mister Condo,

Thank you for responding to my question regarding sales tax. To clarify, the tax that is being charged is a tax on the property manager’s fee for the percentage of their fee based on the number of “rented units”. It is not a tax on common fees but a tax on the management company fee. The property manager said to us that it is a state law that this tax be paid. Please clarify is you are aware of this state tax. Thank you.

Mister Condo replies:

D.P., thank you for the clarification. I am very much aware of this tax and you can read about it as well at http://www.ct.gov/drs/lib/drs/publications/pubsip/2006/ip06-35.pdf. In particular, read Page 20 if this book and you’ll see a very clear explanation. How it works in Connecticut is that rental units qualify as commercial property for income and are subject to sales tax on the management fees. Units that are owner-occupied are not subject to the commercial property management fee tax. Sounds like your property manager was right on top of this. Kudos!

Condo Insurance Claim Settled; What are the Tax Implications?

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R.G. from New Haven County writes:

Dear Mister Condo,

Our condo incurred damage in 2005 and filed an insurance claim, which resulted in a dispute and protracted litigation.  When the claim was finally settled, the Association distributed most of the proceeds to the owners in cash payment, while retaining 20% to increase the reserve account.  What is the tax treatment of the distribution on the owners’ individual tax returns?

Mister Condo replies:

R.G., I am glad that your insurance issue was finally settled. It is amazing how long and drawn out the claim and payment process can be. Since your question is of a tax nature, I reached out to my friend Sam Tomasetti, CPA of Tomasetti, Kulas & Company, P.C. for his opinion. Sam indicated that your best advice is to speak with your individual tax advisor as there are too many factors that go into the determination of what’s best for you as an individual owner. Here’s what he had to say:

“This question has too many possible answers for a quick answer. This can be a complicated situation, and one that you really should work directly with your tax advisor on. It is quite possible that all you have is a non-taxable basis reduction in your individual home investment, but as I say, this is a question that needs a more refined approach is allowed for via the “Ask Mister Condo” website.”

That makes sense to me, R.G.. Good luck!

Condo Annual Recording Fee Must Be Paid Every Year!

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C.S. from Hartford County writes:

Dear Mister Condo,

I saw the notice in CONNECT with CAI about the Annual Recording Law. My association hasn’t done this in years, if ever. So I sent the info to our Town Clerk. It was returned saying to have it recorded in the land records there is a $53 fee. Do we really have to do that every year like SOS filing?

Mister Condo replies:

C.S., is anything in life more assured than death and taxes? I asked one of my community association attorney friends for a more complete answer. Here’s the reply:

“Yes.  Connecticut General Statutes Section 42-270(e) says that every association must file a notice with the Town Clerk stating the name and address of the person from whom a Resale Certificate can be requested, and the Town Clerk must file it in the town’s land records.  The fee for filing anything in the land records is currently $53.00 for the first page plus $5.00 each additional page.  This filing must be done annually every January, and also within 30 days after the information changes.”

HOA, LLC, Back taxes, My, Oh, My!

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L.S. from Hartford County writes:

Dear Mister Condo,

Hello, Mr. Condo, Our condo HOA has just received notice that the original developer never dissolved the LLC that was set up in order to sell the individual units approx 7 years ago. The document suggests that the HOA is responsible for the $250/year tax to have the LLC that the developer has not paid (perhaps he wasn’t aware of the need to dissolve the LLC?) Since he sold the last unit over 7 years ago (total amount over 7 years = $1750). Does this sound possible?  The president of the HOA was one of the first owners and members of the board and said that the HOA was never given anything but the condo docs.  How does the HOA dissolve the LLC? And is the HOA responsible for the tax on the LLC?

Mister Condo replies:

L.S., I am sure that was a disappointing notice to get in the mail. My gut instinct was that the HOA has no ability to dissolve the LLC and that is not responsible for this tax but I reached out to an attorney friend for some better guidance. Here’s what he had to say:

“Every LLC in Connecticut is obligated to pay the state an annual flat tax of $250.  Assuming that’s the bill you’re looking at, the condominium is not responsible for it.   A condo association is a separate legal entity from the developer’s LLC and does not inherit its debts.  Neither does the association have any obligation, or even the ability, to dissolve the LLC.  Instead, it’s simply joined the countless abandoned business entities which no longer exist except on paper.  Your board should explain the details to the association’s lawyer just to be certain, but based on what you’ve described here, the association can safely ignore the LLC’s problems.”

Sounds like you’re in the clear on this issue. All the best!

Taxing Question About Roofing Materials

D.J. from New Haven County writes:

Dear Mister Condo,

Does a fully owner occupied condo association with cert-103 pay sales tax on the materials to tear down/replace a roof?

Mister Condo replies:

D.J., when I get a tax question like yours, I go straight to my pal Sam Tomasetti, CPA of Tomasetti, Kulas & Company, P.C. to give us an answer. Here’s what he had to say:

“For the materials portion of a roofing contract, the association should not be billed for sales tax.  It doesn’t matter that the association is 100% owner occupied but rather that the contractor is responsible for paying the sales tax on the materials.  Please see the Contractor’s Guide to Sales and Use Tax, page 47 which discusses the roofing work specifically.  The guide can be downloaded from the State of CT Department of Revenue Services website at http://www.ct.gov/drs/lib/drs/publications/pubsip/2006/ip06-35.pdf.”