Friday, 28 April 2017

Building a Wall Around The Homeowner's Association

Written by Posted On Monday, 20 March 2017 15:59
"Let's build a great big wall around our property", the board president told the directors of his community association. "We have too many cars taking shortcuts through our streets to get to the main highway," he pointed out. "And we have no security at night, I often see strangers wandering over our grounds. Furthermore, our neighbors down the street have a gated community, so why not ours", he added.

"Can we do this", asked one of the directors. "I agree it's needed, but it will cost a lot of money. Don't we need the approval of those who voted us into office", he asked.

That is the $64,000 question: what can a board of directors in a community association do on their own and when do they need the advice and consent of the membership?

The technical, legal answer will always be found in the association's legal documents, usually in their Bylaws. In general, there are two different provisions: one is called "Maintenance and Repair" and the other is "Additions, Alterations or Improvements".

For the first, the board generally has full authority to "maintain, repair and replace" the common areas of the property regardless of cost, although in a very few associations there is a dollar cap, above which the board needs the approval of a majority of the owners.

Additions, alterations or improvements, however, usually impose a financial limit on the board's authority, and the members must approve any work over that dollar cap.

That's the "technical and legal" definition. The problem is determining what is "maintenance" and what is an "improvement". Take this real life example: a cooperative association here in the District of Columbia had a very old phone system, where an operator answered all incoming phone calls and then literally "plugged" the caller into the appropriate apartment's house phone. Some of us older folks may remember Judy Holliday as Ella Peterson, telephone operator, in "Bells are Ringing".

After many years the cooperative's phone system failed. The board arranged to pay and install a totally different system. They based their decision on "maintenance and repair" and did not seek members approval. A member filed suit, claiming this was an improvement which needed the vote of a majority of owners. The DC Superior Court upheld the board's decision. According to the Court, while the new system clearly was an "improvement", since it was impossible to replace the old one, this was, in effect, merely a "repair" of the existing system.

In an 1999 Ohio case, the court provided an interesting definition: "an alteration orimprovement involves the change of things from one form or state to another, where maintenance contemplates the restoration of a thing to its original condition."

Unfortunately, the court cases are inconsistent. I have read cases with identical facts in which one judge called it an improvement and another said it was maintenance. Even the Internal Revenue Service has struggled with these definitions, but you can get guidance from Publication 523, "Selling Your Home" (free online from irs.gov). According to the IRS, you cannot claim anything as an improvement if, when installed, it has a life expectancy of less than one year.

In addition to determining whether the board needs membership approval, there is yet another reason why it is important to determine in which category the work falls: if it is an improvement, association owners may be able to claim their percentage ownership interest in the amount for income tax purposes.

If you bought your condo unit many years ago, it may have increased significantly. Your association has spent a considerable amount of money improving the property. They have added a new roof (or roofs), installed a swimming pool, and made other similar improvements.

In your community association, you own a percentage interest of that association. Let us assume the association spent $300,000 in improvements from the time you bought the property, and that your percentage interest is 1.5. If you multiple your interest times the total improvements, you get $4,500, and this amount could be added to your basis as "improvements." Confirm this with your own tax advisors.

It is surprising to me that many community association owners are not aware of this tax benefit. This is especially helpful for the elderly owner who is selling his or her last property, and does not want to have to pay a lot of tax on the gain that was made. Remember, if the gain is over $500,000 (if you file a joint tax return) or $250,000 for single filers, you have to pay capital gains tax on the overage.

In most community associations, the records should be available as to the total expenditure for improvements on a year to year basis. Please understand that maintenance and repair items are not added to basis, but capital improvements -- generally items which have a useful life of one year or more -- are indeed legitimate items to be added to basis.

Incidentally, the great wall will be an addition, alteration and improvement, requiring membership approval. Why? You did not have a wall before and now you do.

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Benny L. Kass

Author of the weekly Housing Counsel column with The Washington Post for nearly 30 years, Benny Kass is the senior partner with the Washington, DC law firm of Kass, Mitek & Kass, PLLC and a specialist in such real estate legal areas as commercial and residential financing, closings, foreclosures and workouts.

Mr. Kass is a Charter Member of the College of Community Association Attorneys, and has written extensively about community association issues. In addition, he is a life member of the National Conference of Commissioners on Uniform State Laws. In this capacity, he has been involved in the development of almost all of the Commission’s real estate laws, including the Uniform Common Interest Ownership Act which has been adopted in many states.

www.kmklawyers.com
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