The condo or homeowners’ association fees you pay for a property you use as your personal residence are normally not deductible for federal income tax purposes. If you rent out your property you could deduct the fees as expenses of your rental activity. But fees for special assessments or amounts disbursed from reserves for capital improvements could increase your cost basis in the property for federal income tax purposes. The increase in the tax basis would reduce the capital gain you realize when you eventually sell the property.
Improvements increase the tax basis of your property. But improvements must be distinguished from expenses for repairs. According to the IRS, “an improvement materially adds to the value of your home, considerably prolongs its useful life, or adapts it to new uses”. One of the examples offered by the IRS of an improvement that increases your basis is the replacement of an entire roof. So if your homeowners’ association fees include an assessment for that cost, you would add your proportionate share to the tax basis of your condo unit.
Other examples of capital improvements a homeowners’ association might make include elevators, a swimming pool, playground, central heating and air conditioning system, a security gate, a fence around the property, or major landscaping work in common areas.
A repair, according to the IRS, “keeps your home in an ordinary, efficient operating condition. It does not add to the value of your home or prolong its life”. One of the examples of a repair that the IRS mentions is painting. So a homeowners’ association assessment for painting would be considered a repair and would not be added to the basis of your unit.
Amounts paid for assessments for a reserve account, or the portion of normal homeowners’ association fees that are for the reserve account would not be considered capital improvements until the funds are actually disbursed to make the improvements. The homeowners’ association should provide financial statements showing how much was disbursed for these improvements. You could then take your proportionate share, based on your percentage ownership, to determine the amount to add to the tax basis of your unit.
In its Publication 530, Tax Information for Homeowners, the IRS provides a form, Record of Home Improvements, which you could use to keep track of the costs of improvements that increase your tax basis.
You should keep records of the homeowners’ association assessments or disbursements from reserve accounts for improvements that add to the basis of your home. These records should be kept along with any other documentation that supports your basis in the home, such as your settlement statement and any improvements you make yourself in your individual unit. These records should be kept as long as you own your home, and generally for a time after you eventually sell your unit. This would generally be the statute of limitations, which would normally be three years after you file the tax return reporting the sale.
If you sell a home that you owned and lived in as your principal home, you may be able to exclude the gain, depending on when you sell and if that tax provision is still in effect at that time. You should keep records of the basis in your home in any case, to be able to support your tax basis for purposes of calculating the gain or loss on the sale, should any questions from the IRS arise.
Publication 530, Tax Information for Homeowners, IRS
Publication 551, Basis of Assets, IRS
Stephen Fishman, J.D., Tax Issues When Selling a Condo, Townhouse, or Other Property in a Homeowners’ Association, Nolo