Condo Owners Confused over lack of IRS Guidelines on Hurricane Losses
Condo owners confused over lack of IRS guidelines on hurricane losses
By Harriet Johnson Brackey
South Florida Sun-Sentinel
March 25, 2006
South Florida Sun-Sentinel
March 25, 2006
A tax break that was supposed to help hurricane victims has left South Florida's condominium owners wondering what to do.
Their question is: Can I deduct my association's assessment for repairs because of Hurricane Wilma's damage?
Some accountants are saying yes. But the IRS offers no specific guidance on condo assessments in its rules, regulations or publications about casualty losses.
That leaves South Florida's many condo owners with a dicey choice -- take the deduction and hope it's accepted or miss out on a possibly significant tax break.
The way many condo owners see it, "they own every square inch of the swimming pool or that tree," said Myrna Yudenfreund, who is a certified public accountant and whose husband David is a CPA as well. Condo owners who ask the Boca Raton couple to prepare their taxes want to deduct losses just like single-family homeowners. "But there isn't one word [in the tax law for hurricane victims] about condo assessments," she said.
"One accountant told me to take it as a line item on my personal tax return," said Jules Levine, a condo owner from Miami-Dade. "Then we'll see what happens. The IRS could deny the deduction." (If that happened, a taxpayer would owe additional tax plus interest and possibly a penalty.)
Normally, casualty losses would not spark a widespread debate. That's because they depend upon individual circumstances. And, a taxpayer usually has to have a substantial loss before taking a deduction.
By law, a casualty loss has to equal at least 10 percent of the taxpayer's adjusted gross income plus $100 to qualify for a deduction. The taxpayer then subtracts any insurance reimbursement and the result may be an itemized deduction.
But during the current tax season, even small amounts might be deductible. That's because Congress passed a law in late 2005 that said victims of Hurricanes Katrina, Wilma and Rita don't have to meet that 10 percent limit for hurricane damages. They might be able to deduct every penny of their loss after insurance is subtracted. And damages in South Florida due to Hurricane Wilma were widespread. Local accountants are saying plenty of homeowners are claiming losses.
The sticky question for condo owners is whether their special assessments, usually for repairs to the common areas of their buildings and grounds, fit the definition of a casualty loss. The same question faces taxpayers who paid damage assessments for single-family homeowner associations.
The tax law appears to make no mention of it.
There also is no regulation, publication or ruling that discusses condo assessments, says IRS South Florida spokesman Michael Dobzinski.
Dobzinski initially responded in a recent South Florida Sun-Sentinel online tax discussion to questions on this issue by saying that the definition of a casualty loss is for "personal-use" property. Nor are condo assessments a tax, which might qualify for an itemized deduction.
But anyone who wants to ask for a private letter ruling to clarify the issue could write to the IRS and cite "his particular facts and circumstances and the condo documents that pertain to the individual situation," Dobzinski said.
However, that process would likely not produce an answer before federal individual income taxes are due April 17. And the IRS charges big fees to issue letter rulings.
The fee schedule starts at $625 for an individual taxpayer whose income is less than $250,000 and goes up from there.
Attorney Gary Poliakoff, managing shareholder of Becker & Poliakoff, a Fort Lauderdale law firm that represents many local condominium associations, says historically, assessments for maintenance and special assessments have not been tax deductible. He doesn't think hurricane loss assessments are either.
"I think it would take a specific act of Congress to permit this because they don't stop to contemplate items such as this in a multifamily and common ownership setting," Poliakoff said.
On the other side of the debate are Monte Kane, head of Kane & Co., a Miami and Boca Raton CPA firm that often advises condominium associations, and Scott Berger, a tax principal at the South Florida accounting firm Kaufman Rossin & Co. Kane says owners should deduct the assessment as a casualty loss for damage that wasn't covered by insurance.
Berger says you could use the assessment as a way to estimate a decline in the fair market value of your unit. He'd also suggest doing the same with homeowner association damage assessments.
Greg Rosica, a tax partner at Ernst & Young in its Tampa office, says the decline in value is where condo owners should focus their deduction.
As an example, he said if your $500,000 unit pre-Wilma today would sell for $300,000, then you had a $200,000 decline. "It's not necessarily tied to the assessment amount," he said.
Other accountants have suggested that the condo owner get an appraisal to prove that their unit's value has declined due to the hurricane.
And still others are holding back, waiting for official guidance.
"There are accountants who are very aggressive. There are others who are conservative like we are who want to see in the law where it says, `I can deduct that.' I want to see it in writing," David Yudenfreund said. "But we can't get an answer."
Their question is: Can I deduct my association's assessment for repairs because of Hurricane Wilma's damage?
Some accountants are saying yes. But the IRS offers no specific guidance on condo assessments in its rules, regulations or publications about casualty losses.
That leaves South Florida's many condo owners with a dicey choice -- take the deduction and hope it's accepted or miss out on a possibly significant tax break.
The way many condo owners see it, "they own every square inch of the swimming pool or that tree," said Myrna Yudenfreund, who is a certified public accountant and whose husband David is a CPA as well. Condo owners who ask the Boca Raton couple to prepare their taxes want to deduct losses just like single-family homeowners. "But there isn't one word [in the tax law for hurricane victims] about condo assessments," she said.
"One accountant told me to take it as a line item on my personal tax return," said Jules Levine, a condo owner from Miami-Dade. "Then we'll see what happens. The IRS could deny the deduction." (If that happened, a taxpayer would owe additional tax plus interest and possibly a penalty.)
Normally, casualty losses would not spark a widespread debate. That's because they depend upon individual circumstances. And, a taxpayer usually has to have a substantial loss before taking a deduction.
By law, a casualty loss has to equal at least 10 percent of the taxpayer's adjusted gross income plus $100 to qualify for a deduction. The taxpayer then subtracts any insurance reimbursement and the result may be an itemized deduction.
But during the current tax season, even small amounts might be deductible. That's because Congress passed a law in late 2005 that said victims of Hurricanes Katrina, Wilma and Rita don't have to meet that 10 percent limit for hurricane damages. They might be able to deduct every penny of their loss after insurance is subtracted. And damages in South Florida due to Hurricane Wilma were widespread. Local accountants are saying plenty of homeowners are claiming losses.
The sticky question for condo owners is whether their special assessments, usually for repairs to the common areas of their buildings and grounds, fit the definition of a casualty loss. The same question faces taxpayers who paid damage assessments for single-family homeowner associations.
The tax law appears to make no mention of it.
There also is no regulation, publication or ruling that discusses condo assessments, says IRS South Florida spokesman Michael Dobzinski.
Dobzinski initially responded in a recent South Florida Sun-Sentinel online tax discussion to questions on this issue by saying that the definition of a casualty loss is for "personal-use" property. Nor are condo assessments a tax, which might qualify for an itemized deduction.
But anyone who wants to ask for a private letter ruling to clarify the issue could write to the IRS and cite "his particular facts and circumstances and the condo documents that pertain to the individual situation," Dobzinski said.
However, that process would likely not produce an answer before federal individual income taxes are due April 17. And the IRS charges big fees to issue letter rulings.
The fee schedule starts at $625 for an individual taxpayer whose income is less than $250,000 and goes up from there.
Attorney Gary Poliakoff, managing shareholder of Becker & Poliakoff, a Fort Lauderdale law firm that represents many local condominium associations, says historically, assessments for maintenance and special assessments have not been tax deductible. He doesn't think hurricane loss assessments are either.
"I think it would take a specific act of Congress to permit this because they don't stop to contemplate items such as this in a multifamily and common ownership setting," Poliakoff said.
On the other side of the debate are Monte Kane, head of Kane & Co., a Miami and Boca Raton CPA firm that often advises condominium associations, and Scott Berger, a tax principal at the South Florida accounting firm Kaufman Rossin & Co. Kane says owners should deduct the assessment as a casualty loss for damage that wasn't covered by insurance.
Berger says you could use the assessment as a way to estimate a decline in the fair market value of your unit. He'd also suggest doing the same with homeowner association damage assessments.
Greg Rosica, a tax partner at Ernst & Young in its Tampa office, says the decline in value is where condo owners should focus their deduction.
As an example, he said if your $500,000 unit pre-Wilma today would sell for $300,000, then you had a $200,000 decline. "It's not necessarily tied to the assessment amount," he said.
Other accountants have suggested that the condo owner get an appraisal to prove that their unit's value has declined due to the hurricane.
And still others are holding back, waiting for official guidance.
"There are accountants who are very aggressive. There are others who are conservative like we are who want to see in the law where it says, `I can deduct that.' I want to see it in writing," David Yudenfreund said. "But we can't get an answer."
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