What Are the Rules for Condominium Taxation?

A condominium is a form of property ownership combining a private residence with shared ownership of common facilities like land, lobbies, and pools. An owner holds direct title to their unit and a fractional interest in these communal areas. This hybrid ownership model creates unique tax situations that differ from single-family homes, affecting everything from annual property taxes to the eventual sale of the unit.

Understanding Condo Property Taxes

Local property taxes for a condominium are determined by a government assessment of the property’s value. Your tax bill reflects the market value of your individual unit and your proportional stake in the common areas. These shared spaces, which can include the land, hallways, and recreational facilities, contribute to the overall value and your tax liability.

The assessment is calculated by analyzing recent sales of comparable properties in the same area. Assessors consider factors that influence a condominium’s market value, such as the building’s age, the unit’s square footage, its location, and construction quality. Based on this value, the local government applies a tax rate to calculate the final amount owed.

A condo owner is usually billed directly by the local taxing authority and is responsible for paying the property tax. However, some associations may collect these taxes with regular dues and remit the payment to the government for all owners. It is important to understand your specific arrangement. You may also receive a Notice of Assessment detailing your property’s valuation, which is the basis for your tax bill.

Income Tax Deductions for Condo Owners

Condo owners who use their unit as a primary residence and itemize deductions on their federal tax return can access certain tax benefits. One is the mortgage interest deduction, which allows homeowners to deduct interest paid on their mortgage from their taxable income. This deduction is available for interest paid on up to $750,000 of mortgage debt for loans originated after December 15, 2017.

Another deduction is for state and local taxes (SALT), which includes property taxes paid on your condominium. This allows you to deduct property taxes along with state and local income or sales taxes. The total amount you can claim for the SALT deduction is capped at $10,000 per household per year, which can affect owners in high-tax areas.

To claim these deductions, you must file a Schedule A with your Form 1040. The interest paid on your mortgage is reported by your lender on Form 1098. Property taxes paid can be found on your purchase settlement sheet or the annual statement from your mortgage lender if you use an escrow account.

Tax Treatment of Association Fees and Special Assessments

Regular association fees that cover routine maintenance, landscaping, insurance for common areas, and daily operational costs are not tax-deductible for a personal residence. The IRS views these as personal living expenses, similar to the upkeep costs for a single-family home.

A different set of rules applies to special assessments, which are one-time fees for major repairs or capital improvements like replacing a roof or installing new elevators. While these payments are not deductible in the year they are paid, a special assessment for a capital improvement increases your property’s cost basis.

Cost basis is the total amount of your investment in the property for tax purposes, starting with the original purchase price. When you pay a special assessment for a capital improvement, you add that amount to your basis. This adjustment is important because a higher basis can reduce the taxable gain when you sell the condominium, so you should keep detailed records of all special assessments.

Capital Gains Tax on the Sale of a Condo

When you sell your condominium for a profit, it may be subject to capital gains tax. The gain is calculated by subtracting the property’s adjusted cost basis from the sale price. This adjusted basis includes the original purchase price, certain closing costs, and the cost of capital improvements, including any special assessments paid.

A tax benefit available to many condo owners is the Section 121 exclusion, also known as the primary residence exclusion. This rule allows you to exclude a portion of the capital gain from your income. To qualify, you must meet both the ownership and use tests: you must have owned the condo and used it as your main home for at least two of the five years leading up to the sale. The two years do not need to be continuous.

Single filers can exclude up to $250,000 of gain, and married couples filing a joint return can exclude up to $500,000. This exclusion can be used once every two years. If you have a gain that exceeds these exclusion amounts, the excess will be taxed at the long-term capital gains rate, which ranges from 0% to 20% depending on your taxable income. The sale is reported on Schedule D and Form 8949 of your federal tax return.