If you’re just joining us, the three previous parts in this series summarized how ownership of conventional single-family dwellings differs from ownership of condominiums or co-op apartments and when the IRS will allow owners of co-op apartments to build up the adjusted basis for their apartment. This article, part four, will summarize other increases or decreases to adjusted basis.
How a co-op owner should calculate gain when they sell their apartment. Sellers are liable for taxes when they realize gains greater than the profit exclusions authorized by Internal Revenue Code Section 121. The exclusions are as much as $500,000 for married persons who file joint returns or $250,000 for those who file single returns or married couples who file separate returns.
An owner’s sale results in a gain only when the amount that they realize on the sale exceeds their apartment’s adjusted basis, the figure they must use to determine gain from a sale.
Most owners’ basis begins with the original purchase price. This includes any debt they assume, such as a mortgage, as well as certain settlement or closing costs connected with the purchase, such as an attorney’s fee and filing an application with the co-op board, as mentioned in part two.
Capital improvements. During the years of apartment ownership, their basis inevitably undergoes adjustments or revisions. The IRS allows them to adjust upwards for what they have spent on within-the-apartment capital improvements, as opposed to repairs.
The agency allows basis increases that reflect their share of board-authorized special assessments for capital improvements that benefit all apartments, such as replacing rugs in corridors or renovating lobbies. Ditto for their share of mortgage amortization payments, that is, payments of principal on the underlying mortgage for their building.
Casualty and theft-loss deductions. Will the IRS also require them to adjust downwards if they satisfied the requirements for such deductions? Only if they qualified, and they probably didn’t.
Here’s how these rules work. The Tax Cuts and Jobs Act severely curtailed deductions for casualty and theft losses.
The restrictions apply only for 2018 through 2025. The rules that applied for 2017 and earlier already imposed severe limits on deductions for losses claimed by property owners whose homes, household goods and other property suffer damage or destruction due to unpredictable events (Internal Revenue Code Section 165 (h)).
What kinds of events pass muster? Only those that are “sudden, unexpected or unusual.” The wide-ranging list of unpredictable misfortunes includes earthquakes, fires, floods, hurricanes, landslides, lightning, sonic booms, storms, tornadoes, tsunamis and volcanic eruptions.
The old rules authorized a big barrier. Code Section 165 (h) specified that losses for personal-use assets, after reductions for insurance reimbursements, generally were deductible only to the extent that the total amount in any one year surpassed 10 percent of an owner’s adjusted gross income.
While the TCJA retained the 10-percent threshold, it added restrictions for 2018 and later years. Generally, owners are able to avail themselves of deductions for uninsured casualty losses only when they satisfy two requirements: first, they suffer losses that are attributable to natural disasters like floods and wildfires, and second, losses occur in disaster areas declared by the president to be eligible for federal assistance.
What’s next. Part five will discuss other instances when co-op apartment owners must increase or decrease their adjusted basis.