What exactly is an "assessment" in this case?

This is an easy one ... proceed down the path with the seller. Then, at a strategically sensitive point in the deal, "realize" that this assessment is in place, question the building's reserves, say you didn't budget for this excess, and tell the seller you'll only proceed if he picks up these costs for you or deducts it from the purchase price.

Good luck with ritchi's plan--not likely to fly. But even if the seller does by some miracle agree to cover the current assessments, the fact that they are there at all would make me worry about the stability of the building's financials. Are you going to wind up with assessments right and left going forward because the building has a low reserve?

I recently backed out on a co-op deal for this very reason--the building was (is) in the middle of a two-year assessment and sure enough, we discovered it has an unacceptably low reserve fund. Not a good sign for things to come.

To answer your question about what it means--yes, the assessments are additional to the maintenance charges. You can ask what capital improvements were made--it could have been anything from a new boiler, to elevator, roof or facade work.

Already we see the difference between a guy like me and a guy like bramstar. I'd save you a ton of money through 2012.

ps - notice that assessment starts with ass

ritchi--

If the building's a dog financially, it really wouldn't matter whether she saved a little dough in the near-term with your plan. She'd still be stuck with the dog. And likely plenty more assessments (yes, there's that ass-word again) down the road.

First, capital assessments are not rare or unusual. It is the reason, amount and overall financial picture that matter more than the mere fact that an assessement is in place. And if a capital expense needs to be made, you are better off as an owner having a special assessment for it than a maintenance increase to pad the reserve fund to cover the expense. Assessments are better to the extent that when you sell you can deduct all special assessments as capital improvement expenses. You can't do that for maintenance increases that are basically used for capital expenses.

Second, few buildings can have reserves adequate for replacement of all windows, for example, or major Local Law 11 compliance expenses (scaffolds, repointing, reconstruction of lintils and repair of corroded ironwork behind the brick or terracotta facade), reconstruction of the sidewalk vault the same year the elevators were slated for repair and the interior hall renovations are looming. Even if the reserve could handle this, it would have to be replenished with a special assessment. And when it comes to resale people like lower maintenance and don't give a crap about the special assessment you paid 5 years earlier. Anything you can do to keep maintenance low preserves or increases the value of the property.

Third, without knowing more here, it is impossible to answer your questions. What is the assessment for? Is that reasonable? What is the reserve? Basic due diligence including review of building financials and board minutes should easily answer these questions.

Finally, ritchi's opinion is worth considering. I would just suggest doing it a little more up front and transparently rather than being coy about it.

kylewest - just a quick follow-up question on your note. Can you further explain the tax treatment of special assessments vs capital improvements paid through maintenance? Similarly, I know special assessments to payoff the underlying mortgage are treated as APIC but reductions in principal paid through maintenance do not go in as APIC. It seems to me the that if you are tracking your capital improvements and debt service(whether through maintenance or special assessments), then that would be sufficient enough for the IRS when computing your cost basis. Not a tax person, but I've seen this referenced a few times on this board but haven't seen the relevant tax code. Any helpful comments from others would be appreciated.

It is practically impossible--maybe outright impossible--for you to determine what portion of building expenditures on capital expenses may be apportioned to you. For example, the day after you take ownership the building used $150,000 of reserve to buy windows. You didn't contribute a penny to that. Similarly, it will not be possible 10 years after you buy the place to determine what portion of your maintenance payments 9,8,7, or 6 years earlier went to replenish the reserve and were then spent on other capital expenses. It's a mishmosh. The point is, if the building is paying for capital expenses out of its reserves which were accumulated before you lived there, and rents from lockers, and tax credits, etc., funds, you won't be able to take a part of it to deduct as a capital expense from the basis cost of your apartment. I'm not sure if I'm explaining this well, but it is not done because coop/condo accounting just doesn't provide the info necessary.

Now, not all special assessments go to capital expenses. In the first example I gave of windows, let's say in year 2 of you owning the unit you get a $5000 assessment so the building can replenish the reserve fund. That $5K may go to pay for anything in the future--not just capital expenses. maybe it will be used to supplement high heating costs one winter. Yet, when you sell, it is pretty accepted that all special assessments you claim as capital expenses will be viewed as legitimate deductions. It is a kind of compromise given that you can't determine exactly how much you personally contributed to the capital expenses over the years. So the bright line is deduct assessments and amounts set forth in the annual letter and form you get from the coop managing agent and that's it.

Maybe an accountant on the board can correct me if I've misstated anything or someone with a better understanding can state it better.

Appreciate the insights. In terms of tracking capital improvements over time, I think it is rather easy regardless of whether or not it was paid from reserves or part of an assessment. At point of ownership, the buyer is valuing the balance sheet in the purchase price, so any assets (and debt) are now "owned" by the buyer (which is why we should truly understand the underlying financials and reflect their condition in our purchase price). So first year might be subject to understanding the timing of capital spend, but assuming spend was post-sale, the capital improvements accrues to the benefit of the buyer. All subsequent years capital improvements are easily allocable based using the annual report. So from an IRS perspective, as long as you can provide evidence of the cost of the capital improvement, I would think it would be deductible, regardless of how the cash was characterized at point of contribution. Seems like simply deducting special assessments used to cover operating shortfalls could get you in jeopardy. Any accountants that can cite tax code on this one?

Are you saying that if on day 1 of ownership of a unit in a ten unit coop where all units are equal, the building spends $1M out of the reserve fund to pay for facade work, and you sell on day 2 for a $100,000 profit, you would have no capital gains because you could add $100,000 to your cost basis?

I'm not saying that. I think truthmaker is saying that. It doesn't sound right, but I'm not an accountant.