Capital Gains and Capital Improvements When Does a Repair Become a Renovation?

The benchmark for calculating capital gains on your unit is determining your cost basis in the unit. The cost basis for co-op and condominium units is calculated on the original purchase price of the shares or unit, plus capital improvements made during the entire period that the asset is held.

Eliot Lebenhart, a partner at Woodbury, New York-based accounting firm KVLSM explains how capital gains on a primary residence -- including co-ops and condos -- are calculated under the current tax law: “The sales price, minus commissions and other closing costs, minus your basis purchase price plus capital improvements. The difference between the two is your capital gain.” Lebenhart says that “If this is a primary residence, and you are single and have lived in the unit for two out of the last five years, you can exclude $250,000 from capital gains taxes. If you are married and filing jointly, the exclusion goes up to $500,000.”

Keeping up your property now will clearly help you keep taxes down later. So say you're single and paid $400,000 for your apartment 15 years ago, and then sold it today for $900,000, incurring $100,000 worth of closing costs. Your basis would be $900,000 minus that $100,000. Your cost basis in the property would be $400,000; $900,000 minus $100,000, minus the original $400,000 purchase price. Your exclusion would be $250,000, resulting in a taxable gain of $150,000. At the current 15% your capital gains tax would be $22,500.

Now, using the same example, let's say that you put a new kitchen and bathroom twice during the 15 years you called the unit home, at a cost of $30,000 each time, for a total of $60,000 in capital improvements. You would deduct that $60,000 from your basis as well — so $900,000 minus $100,000 in closing costs, and minus $60,000 in capital improvements, for a taxable basis of $340,000, resulting in taxable gain of $90,000 and a tax of $13,500 -- a savings of $9,000.

What Constitutes a Capital Improvement?

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3 Comments

  • 1.How does capital gains work if you are selling a coop that is not your primary property? 2. Can you discuss placing a coop in a trust . How do you do this? Is it advisable? What are the rules regarding how coops look at this: pros and cons for the coop owner and for the coop board. Thank you.
  • What about the costs to put in new roof, new carpeting, new facade, new intercom and new boiler in the co-op? Is that assessment per apt. considered capital gains?
  • @Gina - such assessments generally increase your cost basis and decrease your capital gains. @Ellie - for non-primary resident property, capital gains work the same as in the article, except the capital gain would be fully taxable, as it is not eligible for the primary resident exclusion.