Discussion:Wilma casualty losses of homeowner's associations
From TaxAlmanac
Discussion Forum Index --> Tax Questions --> Wilma casualty losses of homeowner's associations
| 24 December 2005 | |
I practice in Dade and Broward Counties in Florida. We were badly hit by Hurricane Wilma. Congress has just passed a new bill giving Wilma loss victims the same exemption from the 10% of AGI plus $100 reduction of casualty losses as Katrina and Rita victims previously received. I assume that the president will sign it into law. I have been attempting to find out if losses by condominium associations, homeowner's associations and co-op corporations can be passed through to the homeowners. I have found almost nothing on the subject. (I found one letter ruling which did not directly address the issue and which was determined on other grounds.) Can anyone direct me to anything authoritative on the subject?
Arnold Slotkin | |
| 6 January 2006 | |
| I am not sure that the association actually owns the common areas. In most states, the common areas are owned by the members and each member owns a tenants in common interest in the common area. Thus, in a TIC case, the casualty loss would be shared by the owners. See Revenue Ruling 81-152 regarding damage to common areas. | |
| 16 January 2006 | |
| Thanks for the reference to 81-52. It didn't solve my problem, but I found it very interesting. I also felt that it reached the wrong conclusion. Based on the Ruling as I read it, if John Smith bought a house for $100,000 and, because the developer cut corners, the association had to sue to obtain funds to correct the deficiencies, John would have to reduce his basis by his share of the award, let's say $5,000. If the association then used the award to make the needed improvements John would not get a step-up in basis because there was no special assessment. He would therefore wind up with exactly what he thought he bought in the first place and with $5,000 less in basis. | |
| 16 January 2006 | |
| That is not what Revenue Ruling 81-152 is suggesting. In fact, RR 81-152 is specifically states the opposite in the last paragraph of the ruling.
The Service is pointing out that the association is acting as agent of the tenants in common owner. Under common-law agency principles, any improvements done on behalf of the tenants-in-common using funds from the tenants-in-common would be treated as being made by the TIC’s as principals and not the association as agent. See last sentence in the last paragraph of RR 81-152 below. To the extent capital assessments are, or have been, made against the unit owners for the purpose of making the necessary repairs or replacements, OR THE ASSOCIATION RETAINS THE AMOUNTS RECOVERED IN THE SUIT AGAINST THE BUILDER AND USES THEM FOR CAPITAL REPAIRS, REPLACEMENTS, OR IMPROVEMENTS, THE UNIT OWNERS' BASES, UNDER SECTION 1016, WILL BE INCREASED. | |
| 18 January 2006 | |
| I was wondering if, since your last post, you've come to any conclusions or have discovered any additional suppport for the position of having homoeowners take their prorata share of the casaulty losses. I practice in Palm Beach County. | |
| 18 January 2006 | |
| A casualty loss is available to the owner of the property. If the common areas are owned by the homeowners as tenants in common, then there would obviously be no problem with deducting any casualty losses on the common areas on Form 1040. | |
| 24 January 2006 | |
| My question actually stemmed from a casualty loss that one of my clients suffered several years ago. They lived in a townhouse that was a member of a Homeowner's Association. The exteriors of the homes were the responsibility of the Association. A storm caused their second floor balcony to collapse and rip off a portion of the front wall of the house including the front door. The Association denied responsibility so they sued and won. The Association then dissolved. My clients then sued the members of the old Association individually. The court ruled that there was no individual responsibility. This led me to assume that a Homeowners Association is something other than a tenancy in common. Section 216, which details three items in which such associations are pass through entities, would also lead you to believe that the pass throughs are not automatic but have to be granted by legislative action.
My initial reaction was that this research should be a slam dunk. Co-ops, condos and homeowners associations have been suffering casualty losses for years so there should be lots of guidance. I can't find any. I've spoken to several attorneys who deal in condominium matters and none of them know of an association that has actually provided its owners with information as to what sort of deductible loss they suffered from a casualty. I have come to suspect that the losses from Wilma (and Katrina in the Panhandle Counties)have two factors that make them unique. The first is the removal of the 10% AGI floor on the Schedule A deductions and the second is the Florida statute that requires a minimum 2% deductible on windstorm losses. A number of my clients have already asked me if the assessments voted on by their associations are going to be deductible. We all know that this isn't the definition of a casualty loss, especially as the Association Board of Directors could be using Wilma as an excuse for installing all sorts of capital improvements. Deductibility is going to involve some sort of investment on the part of the association to establish the loss under casualty loss rules. At a time when the Boards are forced to create large and unpopular assessments they are not going to add an expense unless they can show the homeowners an immediate return. | |
| 2 February 2006 | |
| I now have a written opinion from the law firm of Becker and Poliakoff, a large firm with offices throughout Florida. They have a large practice in Community Association law. They do not believe that, based on Section 528 and/or Revenue Ruling 75-370, an Association can pass through casualty losses to its members. Those two references seemed to me to be the main supports of Revenue Ruling 81-152 which Riley2 helpfully suggested might help us to get a deduction for the many people who were hurt by Katrina, Rita and Wilma. I had not quoted 81-152 in my query because it did not refer to a casualty. I have just emailed the attorney who signed the letter asking him to consider the IRS reasoning in it. That's my last shot. If it doesn't produce a positive answer I'm just going to have to tell my clients that all they are going to get out of their losses is an increase in the basis of their homes. If anyone comes up with a better answer, please let me know. | |
| 2 February 2006 | |
| Revenue Ruling 75-370 is helpful in that it points out that the ownership of common area property hinges on state law, not federal tax law. For example, in my state, some common areas are owned as tenants in common, which confers ownership rights to the member. However, in some states, no TIC exists for common areas.
The key question is whether, under Florida law, a member has a tenancy in common interest in the common areas or simply an easement to use such property. | |
