Effects of Reserve Contributions on Unit Owner Basis

June 6, 2014


By: Marc Whitfield, CPA, CFST, MBA – Tax Manager

Do you really know what your home is worth?  There are many things that add value to your home, but one that is forgotten most often is the money you pay to your association’s reserves.  As an owner in a condo or homeowner’s association, you pay assessments that go towards operating expenses and future capital replacements.  Florida statutes require condominium associations to establish funds set aside for certain future capital replacements, unless properly waived. These requirements consist of funds set aside for painting, roofs, paving, and any other capital expenditures in excess of $10,000.  Homeowner’s associations may be required to fund reserves depending on their situation.  What you may not know is that some of those assessments that you pay towards capital replacements or reserves increase the tax basis in your home.

Why is this important?  It has the effect of reducing any potential capital gain you may have when selling your residence.  However, only contributions toward “capital projects” can add to your basis.  Capital projects do not include painting and sealcoating according to the IRS, although painting is a required reserve for state purposes.

For example, a home owner pays $250,000 for a condo, pays closing costs of $5,000, and spends $15,000 over the years for renovations inside the condo.

  Basis in home is:



  Closing Costs




  Basis before capital assessments 


The homeowner also paid in $400/month for 5 years in capital reserve contributions, of which $100 per month was for painting.

  Basis before capital improvements


  Capital assessments (400-100) x 12 x 5 yrs


  New basis after capital improvements


Remembering to add the capital contributions to your basis is not that important if you use your unit or home as your primary residence and meet the requirements of Internal Revenue Code 121 which excludes gain on primary residences up to $500,000 for married couples, and $250,000 for singles.  You would have to have a significant appreciation in value to trigger any gain.

If you rent your unit out, you will find that you may have a benefit you have not thought about.   If you correctly only deduct the operating fee as an expense, you can add the capital assessment to your basis and depreciate.  If you currently deduct the entire condo fee as an operating expense, you are actually in error since only the operating fee is deductible.

For any owner’s that work at home and claim the home office deduction, the capital assessments can be added to your basis and depreciated, as well.

Stroemer & Company can help you with these few tips and more.  We are a full service consulting and Certified Public Accounting Firm with offices in Aventura, Fort Myers, Naples, and Sanibel.  We offer a wide range of services including audits, reviews, and compiled financial statements, business consulting, tax preparation and planning, bookkeeping, and management consulting.  Plus, beyond the traditional accounting and tax services, we become your trusted advisor.  For a free consultation please call 1-855-STROEMER or visit us at www.stroemercpa.com.

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