Is the Sale of Association Property Taxable?

Sales of common areas to nonmembers are taxable events. The two questions become 1) what is the basis and 2) who is the taxpayer. In most cases, the answer to the first question is that there is no basis. If the property was transferred from the developer, the basis is generally zero. If the Association purchased the property, then the basis is the purchase price less depreciation. In most cases, the taxpayer is the Association. However, if title is held by the members, then it arguably should be taxable income to the individual homeowners. PPC states that the homeowners should be notified of the sale and they should report such on their individual tax returns. In my opinion, if the monies are not returned to the homeowners, this in fact may be taxable income at the member level; however, without returning the monies, in effect the Association has special assessed the members and at a minimum it is membership income. The fact remains, however, that the IRS is going to be looking for someone to pay the tax on the sale and it may be prudent just for the Association to pay the taxes.

When is a person a member vs. nonmember for tax purposes? In Technical Advice Memorandum 9637007, the sale of condominium units by the Association was considered to be membership income, because as a condition of the sale the owners were required to become members of the Association prior to the purchase of the units. I have used this TAM twice now – once when a former manager unit was sold and once when a foreclosed unit was sold. Note: this only applies when form 1120 is filed as the income would be membership income and would need to be handled on the tax return as such. If form 1120-H were filed, then this would be nonexempt function income and would be taxable.