Board member seeks advice on obligation to provide longtime owner with decades of information about reserve fees

It said, “A very important tax benefit is available to owners when they ultimately sell their units. Owners, as part of their condo fee, each year contribute money to the replacement reserve to cover the cost of major improvements in the common elements. To determine the amount by which the profit on the sale of a unit is reduced, add the total contribution you made from the year you bought until you sell from the chart below and multiply it by the percentage of your ownership listed in Exhibit A of the Declaration of Condominium you received in the condo documents.”

An owner who has rented her unit for 40 years contacted us for an update of the reserve fees for each year. We don’t know if this is an old IRS ruling or something current. Although I searched the IRS website, I never found anything that would indicate whether this rule is still applicable. Can you help?

A: There are two components to your question. The first one has to do with the obligations of the condominium association to its members to provide complete information. The second is what documentation a homeowner should keep in order to determine whether there is a profit or loss on the sale of a home.

Complicated, no? So, let’s start with one aspect of your question that applies to most single-family, townhouse and condominium owners. That is, if you own and live in your home as your primary residence for two out of the last five years, the Internal Revenue Service gives the homeowner a gift of excluding up to $250,000 in profit from tax. And, if you are married, the two of you can exclude up to $500,000 in profit from tax. This simple exclusion will take care of most homeowners, but not condo investors.

It’s more complicated if you own a condo, townhome or single-family house as an investor. It’s generally pretty easy to determine what you paid for a property and the price you sold it for. It’s usually pretty easy to figure out what your purchase costs might have been along with the costs of sale. If that’s all you needed, you could figure out what you paid, what you got and what your expenses were to come up with the profit you got out of the property.

Over the years, a homeowner might make improvements to the property: new windows, a new kitchen, bathrooms, new floors, new heating and cooling systems, etc. If we were to say that a homeowner paid $100,000 for her condo and then sold it 40 years later for $500,000, it would appear she had a $400,000 profit. If it cost her $5,000 to buy the condo and $50,000 in closing expenses to sell the condo, her profit would be reduced to $345,000.

If the owner upgraded the condo with a new kitchen and bathroom that cost $100,000, she would be able to further offset her profit, bringing the amount of net profit to $245,000.

As you can see, the profit from the sale of real estate can be offset by the costs of purchasing and selling the property along with costs of material improvements made to the property over the years.

Investors have different rules. In addition to offsetting profits with the expenses of purchasing, selling and improving the property, real estate investors also get to depreciate the unit and deduct ownership expenses from their federal income tax return. We don’t have room here to discuss these items in detail, but depreciation and the deduction of expenses lower the income tax an investor will pay each year to the IRS. The investor will get to deduct real estate taxes, insurance costs and maintenance costs of the condominium unit, and some other expenses.

With that as background, let’s dig into the request your condo owner is making. She is asking about those expenses made by the condominium association for the building as a whole. Over 40 years, the association might have put on a new roof, renovated the common areas, installed a pool and recreational facilities, and spent a ton of money on capital improvements in the common areas. She now wants to know what was spent over the last 40 years. She will then tally up what her share of that amount was over the 40 years, perhaps to reduce any taxes she might owe on the sale of the property.

Interestingly, we don’t think the IRS would look kindly on this investor getting a benefit of a deduction for her monthly assessments during the 40 years she owned and rented the condo, and then reduced her taxable profit by the amount the association paid for those improvements over the 40 years. The money she paid in assessments, and deducted, would have been used for improvements to the building. She likely could only get one or the other, but taking both seems to be double-dipping. She’ll want to talk to her accountant on that one.

Her question about the association capital improvements is more relevant for non-investor owned units, that is those owners who do not rent their units. For these unit owners, if their profit will be greater than $250,000 if they are single, or $500,000 if they are married, they may want to know how much of the money they paid toward their assessments went toward capital improvements, such as replacing the roof. They, in turn, can compute what their share of the association’s improvements was to reduce any taxes they may owe to the IRS on the sale of their condo.

How do you track this? Given all of this, condo associations usually distribute financial information to their owners on an annual basis. Some associations go as far as actually listing the amount of expenses the association paid out that would qualify for consideration as improvements, renovations or other capital improvements. In larger associations, this information may be on their online portal while in smaller associations, that information may be in the hands of the person that has the books and records of the association.

In any case, we doubt the recordkeeping request is an IRS rule but rather goes to what the association has and must have in their records. As to what you must give the unit owner now, we don’t know. You’d have to talk to an attorney that concentrates their practice in condominium law to determine what, if any, obligation the association has to provide that information today and how far back that obligation might go.

Thanks for your question.

(Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact Ilyce and Sam through their website, bestmoneymoves.com.)