Reducing the Tax Bite on Apartment Sales

By JAY ROMANO
Published: March 2, 2008
MOST co-op and condominium owners know they get income-tax deductions for the mortgage interest and property taxes they pay on their apartments.
But what they may not know is the full range of tax breaks available when their apartments are sold.
“As a starting point, many owners of co-ops and condos overstate their profit when they sell because they understate their tax basis,” said Julian Block, a tax lawyer in Larchmont, N.Y. “And that is because they fail to take into account improvements made to the building itself and in the case of co-op owners, their share of the amortization of the building’s mortgage.”
At present, Mr. Block said, owners who sell their houses or apartments can exclude up to $250,000 in profits on the sale, provided the home was their principal residence for two of the five years before the sale. (For married couples filing jointly, the exclusion is up to $500,000.)
The profit — or capital gain — is calculated by subtracting the tax basis of the home and the costs associated with the sale (broker’s commission, lawyer’s fees, transfer taxes) from the sale price. The tax basis is the acquisition price plus the costs associated with the purchase and any capital improvements.
Co-op or condo owners are covered by these rules, just as any other homeowner is. So, for example, an apartment owner who completely renovates the kitchen can add the cost to the tax basis. But an owner who simply paints the kitchen walls cannot add that cost to the tax basis because routine maintenance is not considered a capital improvement.
What is unique for owners of co-ops and condos is that they can include in their basis their proportionate amount of the money spent for buildingwide capital improvements.
“Over the years, this can amount to a significant amount of money,” Mr. Block said.
Co-op owners get an additional tax break. Along with an annual deduction for interest paid on the mortgage on their apartments, co-op owners also get to increase their tax basis for their share of payments that reduce the principal of the building’s mortgage. This does not apply to condo owners because there is no mortgage on the building itself.
“And there is yet another way for a co-op or condo owner to reduce capital gains,” Mr. Block said. Many co-ops and some condos impose flip taxes, often a small percentage of the sale price. Since the flip tax is really a transfer fee, the seller can subtract it from the sale price as a cost of the sale, thereby further decreasing the gain realized.
Joel E. Miller, a Queens tax lawyer, said that since co-ops and condos keep detailed financial records, it should be fairly easy for owners to determine their share of qualifying capital improvements made over the years — as well as their share of the amortization of the underlying mortgage — by getting the information from the managing agent.
But he added that it was up to individual owners to keep accurate records of capital expenditures made in their own apartments.