I have a question from Noah S.

My wife and I own a condo that we rent out. We have been pretty much been breaking even on it (and hoping that it will increase in value), as the rent has been covering our mortgage payment, taxes, insurance, and condo fee. Until now.

The condo association has proposed to undertake a $450k masonry project, which will cost us about $10k. We can either pay it up front at a 5% discount, or take on a “temporary fee increase.”

I have three questions:
1) What is the difference between a temporary fee increase and a special assessment? I’m thinking both for sale marketing, and also potentially for tax-deductibility purposes.

2) Which option should we choose? Here are the specific numbers:
$249 existing fee
$796 18-month “temporary fee”
$547 net additional fee
$9,846 total cost over 18 months
$9,354 lump sum at 5% discount

3) Do we have any recourse if we do not feel that this project is worthwhile?

Sincerely,
Noah S.

The relatively easy question to answer is the second one (at least from pure monetary standpoint). I would make the lump sum payment now assuming you have the cash at hand parked in a liquid investment. Instead of looking at the lump sum as a discount, the lump sum is what the real payment is, and the 18 month plan an interest carrying installment plan. While the condo fee is not ripping you off it’s effectively charging you 6.5% in interest. I come up with this number by treating the stream of payments as a bond coupon payments for a bond that costs $9,354 (the amount of the assessment). A pretty quick calculation via Excel’s IRR (internal rate of return function) gives me a monthly interest rate of .54% which I just then multiplied by 12 to get an annual rate. Again assuming that you have the cash at hand in a safe money market or savings account, you’re not getting 6.5% on that investment, and certainly not 6.5% after taxes. Even if you have to borrow the money via Home Equity Line, you’re likely to better off given that you can deduct the interest payments. The decision is more complicated if you’re thinking of selling investments to pay for the assessment. Still, the bigger question is the tax implications from making a lump sum payment vs. making temporary condo fee payments, leading to question one…

1) I don’t believe there’s any real difference between a special assessment and temporary fee increase. Seems like this temporary fee increase is just a special assessment over 18 months. As for the tax deduction, the expense should be deductible against your rental income just as your standard condo fee is. Though from my limited tax knowledge this is murky area given the special assessment is going towards what might be deemed a capital improvement. For instance if you owned a rental house and decided to renovate you would not be able to take the total cost of the renovation in lump sum tax deduction. The renovation cost would be added to the cost basis, and you would be able to depreciate that over X years. In the same vein if you lived in your home you could take the special assessment for a capital improvement and add it to your cost basis. I’ve looked through Publication 17 from the IRS and it doesn’t offer any guidance on how this specific situation is treated. I would imagine it would be easier to deduct the 18 increased regular payments as an allowable expense. The lump sum payment looks like a capital expense even if it’s the same. I would also consider consulting an expert in rental real estate tax law which I’m certainly not.

As for sales marketing, I would tend to favor paying the lump sum and letting prospective buyers know that you’re doing so. This is how I’ve seen most sellers position themselves. I believe trying to pass the buck scares buyers. I believe when you try to pass the cost, buyers will think that you’re worried about ongoing costs with the condo. This is just an opinion, I don’t know empirically what works best.

3) As for fighting the assessment, there’s always recourse. Stick it to the Man! That said, as member of the association you are bound by decisions of the organization, and it’s much easier to fight decisions before they are made than after. The association has the authority through civil law to force you to pay the assessment. Still, you can always sue the condo association. While an 10 thousand dollar assessment is bad, it certainly could be worse though. I’m not sure what specific actions you can take besides a lawsuit, but I would suggest looking at what others have done and think.