Capital losses are a significant problem for associations, as they are not treated like any other form of income or expense. For corporations, the rule is that capital losses may not be used to offset other regular income, but can only be used to offset other capital gains. What this means is that an Association with a $10,000 capital loss from investment activities may generally not be able to use this loss on its tax return. The loss must be carried back three years and may be carried forward for a period of five years, but may only be used to offset past or future capital gains. For most associations, this means it is lost forever.
Moving on to capital gains, another association recently posed a question regarding a significant capital gain from the sale of common area property. Their take on the matter was that since they consider themselves to be a nonprofit organization, they should not have to pay any tax on the gain resulting from the sale of this property. They also considered it to be such a simple matter that they were going to have the association treasurer just show no gain on the Form 1120-H tax return. For this association, taxes had always been such a simple matter that they had always prepared their own tax return. This year, since they had this sale of common area property, they thought they should at least ask the question. As soon as we started asking them questions about the gain, however, they realized they were in way over their head on this one.
Before an association can properly reflect a capital gain on its tax return, its board of directors need to know the answers to the following questions:
Who is REALLY the taxpayer?
What is the tax basis in the property sold?
Was this a complete or partial sale?
What did you do with the sales proceeds?
Who is the taxpayer? While that may seem like a dumb question with an obvious answer, it’s amazing how many people can’t answer the question. If the Association is a planned development that holds title to its common area property and is selling a parcel of property to which it has title, then the answer is simple: the Association is the taxpayer. If, however, the Association is a condominium association, which generally does not hold title to its common area property, then it becomes a more complex question.
If it is determined that the Association is the titleholder of the property, then the Association is the taxpayer.
However, in the more common circumstance where the Association is simply acting as the agent for the members of the Association, then the members of the Association are the taxpayers, not the Association. If you have determined that the members of the condominium association are in fact the titleholder to the property, you are then led to the remaining questions two, three, and four above.