Condo casualty losses: Deductions for common-interest property

After a condominium or other common–interest property suffers a casualty loss, individual owners may receive a large assessment to cover the uninsured portions of the loss. Since those owners ultimately pay for the casualty loss, some come looking for the corresponding offsetting casualty loss tax deduction only to find out that, unlike for single–home casualties, there usually is none — even in a federally declared disaster area. However, there are a few nuanced exceptions.

After providing some background, this article examines case law on this subject and how it differs somewhat from the IRS’s interpretation in FAQs. Then the discussion turns to the question of how condos, cooperatives, and planned communities could try to structure themselves to enable their unit owners to deduct casualty losses arising from damage to the community’s common areas, such as a pool or parking lot.

Background on casualty losses

Sec. 165(a) allows as a deduction any loss sustained during the tax year that is not compensated for by insurance or otherwise. Sec. 165(c) places limitations on the loss allowed under Sec. 165(a) to individuals. Lossesin respect of property used in a trade or business or held in a transaction entered into for profit are deductible under Secs. 165(c)(1) and 165(c)(2) without regard to causation. Sec. 165(c)(3)allows individual taxpayers a deduction for certain unreimbursed losses¹caused by fire, storm, shipwreck, or other casualty, or from theft.

Prior to 2018, individual taxpayers who itemized deductions could deduct these unreimbursed personal casualty losses to the extent each loss exceeded $100 and their total exceeded 10% of the taxpayer’s adjusted gross income (AGI).² For tax years 2018 through 2025, Congress limited the casualty loss deduction to only losses resulting from federally declared disasters.³

For these purposes, “federally declared disasters” are those determined by the president to warrant assistance under the Robert T. Stafford Disaster Relief and Emergency Assistance Act and occurring in the disaster area so determined to warrant assistance.⁴ The Federal Emergency Management Agency (FEMA) has on its website a searchable database to determine whether a disaster was declared for an event and the dates of the incident period for that disaster.⁵ H.R. 1, P.L. 119–21, known as the One Big Beautiful Bill Act (OBBBA), expands the provision to include state–declared disasters.⁶ The term “state–declared disaster” means “with respect to any State, any natural catastrophe (including any hurricane, tornado, storm, high water, wind–driven water, tidal wave, tsunami, earthquake, volcanic eruption, landslide, mudslide, snowstorm, or drought), or, regardless of cause, any fire, flood, or explosion, in any part of the State, which in the determination of the Governor of such State (or the Mayor, in the case of the District of Columbia) and the [IRS] causes damage of sufficient severity and magnitude to warrant the application of the rules of this section.”⁷

Despite the federally declared disaster relief limitations, Congress has often passed legislation declaring certain losses to be “qualified disaster–related personal casualty losses.”⁸ This legislation has attached this label to losses resulting from specific disasters such as Hurricanes Helene and Ian or those occurring during a specific period. Taxpayers with qualified disaster losses can claim a more generous casualty and theft loss deduction than others. They can deduct qualified disaster losses even if they also claim the standard deduction, generally with different per–incident and AGI limits.⁹

Casualty losses in common-interest communities

The deduction for personal casualty losses is limited to “losses of property.”¹⁰ A taxpayer is not entitled to a deduction for a casualty loss of property owned by another taxable entity, including a corporation of which the taxpayer is a shareholder, even though the taxpayer is assessed by the corporation for a ratable share of the cost of repairs.¹¹

The question of shared ownership of an individual homeowner in the actual property or indirect ownership by holdings in a corporation can raise issues with respect to community–interest property. Community–interest property is real estate where the owner, by virtue of their ownership of a partial interest or unit, must pay for the maintenance, improvement, and insurance of common areas administered by an association.¹² All types of community associations levy assessments to pay for community expenses. Types of common–interest communities include condominiums, planned communities (also known as planned–unit developments), and cooperatives.

Planned communities are properties developed with common open space and special protocols addressing ownership and occupation. The most popular planned communities are those composed of single–family homes and/or townhouses/villas with common areas that can include streets, sidewalks, recreational facilities, etc. Typically, although not necessarily mandatorily, common areas of planned communities are owned by a homeowners association corporation.¹³

A condominium is a property ownership structure that involves both individual ownership and joint ownership. The word also refers to one of a group of housing units (sometimes part of a single building) where each homeowner owns their individual unit space and all the dwellings share ownership of common–use areas such as hallways, common HVAC systems, and landscaping. A condominium owner typically owns their home, but condominium owners own all common areas jointly, so they are all responsible for maintenance. Typically, individual unit owners jointly own an undivided share of a condominium’s common areas.¹⁴

A cooperative is a form of homeownership where residents own shares in a corporation that owns the building or complex rather than owning a specific unit as in a condominium. This shared ownership gives each resident the right to occupy their unit and a say in the management of the building. Each resident receives a proprietary lease, which grants them the exclusive right to occupy their unit. The building is governed by a board of directors, which is elected by the shareholders. 

Common-area property: Who suffers the loss?

The focus of this article is whether an individual homeowner in a common–interest community is entitled to the casualty loss deduction for damage to the community’s common areas. The answer depends upon whether the homeowner possesses an ownership interest in common areas or whether ownership resides solely in an independent entity. For the loss to be deductible, the taxpayer must have an ownership interest in the damaged property itself and not simply be a member of, or own an interest in, a separate entity. Three main court decisions have looked at whether a taxpayer’s ownership interest qualified them for a casualty loss deduction.

The first was West,¹⁵ a 1958 decision of the District Court for the Eastern District of Pennsylvania. In West, an incorporated social club owned a lake, dam, and the lots surrounding the lake. The club members leased the lots for 99 years and built cottages on their leaseholds. The leases gave members no right to use anything except the lot described in the lease, but membership in the corporation gave the members the right to use the facilities of the corporation, including the lake, the lakeshore, a dining hall, and other buildings. In 1955 the dam and lake were destroyed by Hurricane Diane. In a subsequent year, the club rebuilt the dam and restored the lake with funds obtained from an assessment levied on each member. The taxpayer–member conceded that because the corporation was the owner of the dam and lake, she was not entitled to a deduction for her share of the storm damage to them. She contended that because the cottages derived much of their desirability and value from their closeness to the lake, the destruction of the lake decreased the value of her cottage and that she was entitled to a deduction for that loss in value.

The district court noted that the taxpayer clearly had a property interest in her leasehold and the cottage built on it but that she had no property interest in the dam or lake. Instead, her right to use the dam and lake came solely from her membership in the social club. Accordingly, the court upheld the government’s denial of the deduction. The court did, however, note that the taxpayer’s claim to a casualty loss would have had more weight if her rights in the lake were granted by her lease. In such case, her interest in the leasehold could be “considered to extend to an easement in the lake.”¹⁶

A decade later, the Tax Court in Keith, consistent with the district court’s reasoning in West, allowed a deduction in the amount of a taxpayer’s share of the cost of restoring a lake after it was destroyed by a flash flood, where the taxpayer’s rights in the lake stemmed from his ownership of a part of the lakebed, not from his stock ownership in a corporation organized to create the lake artificially.¹⁷ In Keith,a business corporation whose activities were similar to that of a modern–day homeowners association built a large earthen dam to create a lake on a 400–acre tract and then recorded a restrictive covenant that regulated the use of the property (to include recreational use of the lake) and restricted lot ownership to shareholders. The corporation granted deeds, each of which covered a lakefront lot and a portion of the lakebed, to its shareholders. A flash flood caused the dam to break and wash away, leaving the lake completely drained. The landowner–shareholders decided to rebuild the dam.

The cost of rebuilding the dam was assessed upon each landowner–shareholder by the corporation according to the size of their lot and the concomitant number of shares they owned in the corporation. The corporation was the vehicle through which the landowners restored the lake and dam and maintained the lake, regulating its use for the benefit of the landowners. The funds with which it operated were obtained by periodic assessments upon the individual landowner–shareholders.

The Tax Court held that the facts in Keith required a different result from the decision in West. The taxpayer’s rights in the lake did not stem from his ownership of stock in the corporation but from his ownership in “fee” (not merely a lease), subject to the restrictive covenant, of a portion of the lakebed and the land adjoining the lake. Simultaneously, the court, relying on state law, viewed the corporation’s rights granted by the restrictive covenant as being solely an equitable easement covering only the dam and the surface of the lake, with ownership of both the lakebed and the adjacent land being vested in the lot owners, including the taxpayer. The court noted that the restrictive covenant applicable to use of the lake was similar to those restricted covenants inserted in deeds granted by developers of real estate subdivisions that contain an area, such as a park or lake, set off for the common use of the lot owners in the subdivision. Even though authority to maintain this common area and to regulate its use is vested in a separate entity, the entity is held to have no more than an easement with specific restrictions and conditions as to the use and management of the easement. In such case, the individual lot owners take fee title to a proportionate share of the common area adjoining their lot.¹⁸

Because the rights of the corporation were limited to a specific purpose and did not amount to ownership, and the taxpayer’s rights to use the lake were based on his ownership of his lot, not on his ownership of corporate stock, the court held that the taxpayer was entitled to a deduction for the casualty loss. The amount of the loss was measured by his share of the cost of restoration of the lake.

A more recent court decision addressing whether an individual taxpayer had sufficient ownership interest in property maintained and regulated by a separate entity to claim a casualty loss with respect to such property is Alphonso.¹⁹ The taxpayer in this 2013 case was a tenant–stockholder in a New York cooperative housing corporation that owned a tract in Manhattan on which several high–rise residential buildings in a complex had been erected. The complex included a retaining wall that collapsed, causing significant damage.²⁰ The cooperative levied an assessment against each of its stockholders, including the taxpayer, with respect to the damage caused by the collapse of the retaining wall.²¹

As is the case with most housing cooperatives, the taxpayer entered into a proprietary lease with the cooperative in which the cooperative leased the taxpayer a designated apartment. The terms of each proprietary lease of the cooperative required the tenant–stockholder to pay rent equal to an amount defined as the cooperative’s cash requirements.²² Appended to the proprietary lease were so–called “house rules,” which provided that the use of the grounds of the complex (including landscaped gardens and a children’s playground) were limited to building residents and their guests.²³

The taxpayer argued that she held “property rights in the use of the apartment and related grounds, so that [her] loss was the damage to the grounds which directly affected the apartments and the inability to use the related grounds.”²⁴ The Second Circuit, reversing the Tax Court, held that the taxpayer could upon remand be entitled to a casualty loss deduction.²⁵ Similar to the Tax Court in Keith, the Second Circuit looked to applicable New York state property law as well as the agreement between the individual taxpayer and the subject corporation in determining that that taxpayer had a shared property interest in the community premises in addition to her exclusive interest in her unit (in this case, an apartment).²⁶ The Second Circuit considered not only the unique terms of the proprietary lease (most particularly, the appurtenant house rules) but also New York state property law to determine whether the taxpayer’s interest in the complex’s grounds was sufficient to entitle her to claim a casualty loss deduction.²⁷

Regarding New York property law, the court noted that (1) “[t]he ownership interest of a tenant–shareholder in a co–operative apartment is sui generis”;²⁸ (2) although the ownership interest is represented by shares of stock, which are personal property, “in reality what is owned is not an interest in an ongoing business enterprise, but instead a right to possess real property [emphasis added]”;²⁹ and (3) the dual interests of the tenant–stockholder found in the “ownership of a proprietary lease” and as a “shareholder interest in the co–operative corporation” “are inseparable.”³⁰

Unlike the taxpayer in West, whose rights came from different sources — i.e., the right to use the lot came from her lease and the right to use the lake came solely from that taxpayer’s membership in the corporation — the Second Circuit found that the proprietary lease was the source of both the taxpayer’s right to reside in her apartment and her shared right to use the complex’s grounds (as provided by the house rules). Accordingly, the right to use the complex’s grounds did not belong to the stockholders in the cooperative as stockholders but instead could be found in the house rules, as incorporated into the lease. These house rules identified the group of persons having the right to the use of the complex’s grounds not as stockholders but as “building residents and their guests.”³¹

IRS advice to taxpayers

Despite the Tax Court’s holding in Keith and the Second Circuit’s approach in Alphonso, the published advice of the IRS takes a more formulaic and absolutist approach. The IRS publishes many documents providing advice on particular topics. These documents are often in the form of frequently asked questions (FAQs), with the subject matter of the document explored in Q&A format. In its FAQs for Disaster Victims, the IRS poses the following hypothetical and related question under the heading “Property and casualty loss”:

Q5: A homeowners/condo association sustained a loss from a disaster and made a special assessment on owners to replace uninsured property. May the homeowners claim the special assessment as a casualty loss?

In the answer to this question, the IRS states that the members of a homeowners association are not entitled to a casualty loss deduction for damage to the common elements that are owned by the association. Accordingly, the members cannot deduct a special assessment to replace uninsured common elements damaged by a disaster.

On the other hand, the answer to the question states that the members may be entitled to a casualty loss deduction if they own the common elements as tenants in common, with the deductions in proportion to each member’s interest in the damaged common elements. This follows the unit holders’ legal rights in the common elements. It should be noted that tenants–in–common properties are generally flowthrough partnerships, not corporations, for federal tax purposes.

What the IRS does not recognize in its disaster FAQsis that under state law and the particular arrangement of the parties, a defined group of persons may have shared interests that give each person a right to use certain property even if members of that group do not hold title to such property as tenants in common. This was the holding in Keith andAlphonso.

Ultimately, the question becomes whether the owners of units in planned communities in potential disaster areas such as Florida and California have or can create an organizational structure that provides both the benefits of a homeowners association and flowthrough characteristics for potential casualty losses.³² The answer requires understanding Sec. 528, which provides rules for certain homeowners associations.

Homeowners associations under Sec. 528

The IRS holds that most homeowners associations are essentially formed and operated for the individual business or personal benefit of their members and not for a “community,” as required by Sec. 501(c)(4).³³ However, homeowners associations may elect a tax exemption under Sec. 528, where homeowners associations’ exempt–function income escapes income taxation.³⁴ A tax–exempt homeowners association is either of two types of organizations: a condominium management association or a residential real estate management association.³⁵ Membership in either a condominium management association or a residential real estate management association is generally confined to the developers and the owners of the units, residences, or lots.³⁶

Also, membership in either type of association is normally required as a condition of this ownership.³⁷ The regulations issued under Sec. 528 provide a set of other criteria for homeowners associations that require that (1) a tax–exempt organization is organized and operated to acquire, maintain, and manage association property; (2) a majority of its income consists of exempt–function income; (3) 90% or more of its expenditures are for qualified expenditures, which include expenditures for the acquisition, construction, management, maintenance, and care of the organization’s association property; (4) its net earnings do not inure to the benefit of any private person (other than as the direct result of engaging in one or more exempt functions); and (5) substantially all of the units, lots, or buildings in the homeowners association must be used by individuals for residences (emphasis added).³⁸

“Association property” means not only property held by the association but also property commonly held by its members.³⁹ “Exempt function income” means any amount received as membership dues, fees, or assessments from persons who are members of the association.⁴⁰ Taxable income is the gross income of the association other than exempt–function income (nonexempt–function income), less a specific $100 deduction and deductions directly connected with the production of gross income (but not deductions directly connected with the production of exempt–function income). Gross income includes investment income and payments by nonmembers for the use of the association’s facilities.⁴¹

The election for Sec. 528 status is annual. Homeowners associations that elect to be taxed under Sec. 528 do so by filing a tax return on Form 1120–H, U.S. Income Tax Return for Homeowners Associations.⁴² The taxable income of a qualified homeowners association is taxable at the rate of 30%.⁴³ Accordingly, Sec. 528 imposes tax at the entity level and not at the owner level.

Note that Sec. 528 does not require that a condominium association or residential real estate management association be a corporation.⁴⁴ Instead, Sec. 528 simply creates entity–level taxation of the entity’s income that does not come from membership dues, fees, or assessments. In essence, it prevents a collective of individual taxpayers from being taxed on its expenditures that an individual taxpayer could not be taxed upon. For example, if an individual taxpayer sets aside funds to build a tennis court on a residential lot, the setting aside would be a nondeductible personal expenditure, but at the same time, such set–aside would not constitute taxable income. Sec. 528 prevents the taxpayer and the taxpayer’s neighbors from being taxed on assessments they make on each other in order to build a tennis court that all can enjoy.

No Sec. 528 election

If a homeowners association is a state–law corporation, the association will be taxed as a corporation for federal income tax purposes. If a homeowners association does not elect to be taxed under Sec. 528, Sec. 277 generally applies.⁴⁵ Sec. 277(a) provides that in the case of a membership organization that is operated primarily to furnish services or goods to members and that is not exempt from taxation, deductions for the tax year attributable to furnishing services, insurance, goods, or other items of value to members are allowed only to the extent of income derived during the year from members or transactions with members.

The effect of not electing Sec. 528 would be the taxation of the homeowners association in the same manner as a cooperative housing association like that in Alphonso.⁴⁶ As with a Sec. 528 organization, it would segregate its income into receipts from members and those from nonmembers, as well as deductions associated with each. But if receipts from members exceed expenses, the organization would have net taxable income. Normally, though, the net income would be a nominal amount because the typical homeowners association corporation charges dues and assessments only in amounts necessary to cover costs. Nonetheless, it often makes sense for a condominium association to make the Sec. 528 election to retain the tax–favorable treatment of the association’s exempt–function income.⁴⁷

However, the organizational structure for a residential real estate management association affiliated with a planned community may be more complex because it may not be incorporated at all. For example, the residential real estate management association may be a limited liability company (LLC). If the residential real estate management association is a noncorporate “business entity” as defined in the regulations and chooses not to make the Sec. 528 election, its tax status will be determined under the so–called check–the–box regulations⁴⁸ and could be classified as a partnership for federal income tax purposes.⁴⁹ Although the LLC/partnership would not technically be a not–for–profit organization, functionally, it would operate as one, allowing for the passthrough of losses in loss years, subject to owner–level limitations on the losses. Where the management association was originally formed as a corporation, though, the costs of converting to an LLC might outweigh the benefits, and in some states, the corporate entity form is required.

Structuring a residential real estate management association as an LLC

The rise in LLCs as a potential partnership form for tax purposes, with owners’ limited liability similar to corporations’, could potentially benefit members of common–interest communities, but this trend did not fully take hold in the United States until the late 1990s. State laws requiring that residential real estate management associations be organized as corporations may be a historical artifact from prior to the acceptance of LLCs; in those days, the state laws and standard practices leaned heavily to the corporate form for such associations. An LLC formed by the individual property owners would offer civil liability protections to owners in a common–interest development for occurrences in common areas while still potentially allowing for casualty losses to flow to the individual owners instead of an association. LLCs often elect to be taxed as partnerships, with net income or loss flowing through to the LLC owners on a pro rata basis.

Partnership tax consequences of a casualty suffered by an LLC

Sec. 701 provides that a partnership itself is not subject to federal income tax.Sec. 703(a) requires a partnership as an entity to separately compute and report to the IRS its taxable income in the same manner as if it were an individual, with a few differences mandated by the Code.⁵⁰ Sec. 703(a)(1) requires a partnership to segregate and separately compute the eight categories of income, gain, loss, deduction, or credit described in Sec. 702(a). Each partner must report on its own return its distributive share of each of the segregated items, aggregating those items with its own amounts of similar items to determine whether any limitations apply.⁵¹The eight categories of partnership income, gain, loss, deduction, and credit that must be separately stated on the partnership return pursuant to Sec. 703(a)(1) include such things as capital gains and losses, charitable contributions, and dividends. The list also includes other items of income, gain, loss, deduction, or credit, to the extent provided by regulations.⁵² After removing all of these separately stated items, each individual partner will report their share of the ordinary income or loss remaining on Form 1065, U.S. Return of Partnership Income.⁵³

Casualty loss deductions may not be uniform across owners. The rules for individuals deducting casualty losses on a condominium used as a residence differ from those holding a condominium for investment. Individuals who use the condominium as a personal residence would have differing tax treatment based upon their AGI.⁵⁴ Where the owners of a condominium are corporations themselves, the deductibility of casualty losses may vary, much as the tax treatment of partnership charitable deductions may vary.⁵⁵

The regulations provide:

Each partner must also take into account separately the partner’s distributive share of any partnership item which, if separately taken into account by any partner, would result in an income tax liability for that partner, or for any other person, different from that which would result if that partner did not take the item into account separately.⁵⁶

Thus, casualty losses, if deductible, would need to be a separately stated item on the partnership’s Schedule K–1, Parter’s Share of Income, Deductions, Credits, etc., line 11.⁵⁷ In addition, the Form 1065 instructions provide that if there was a loss from a casualty to property not used in a trade or business or for income–producing purposes, the individual partner should be notified. The instructions further state: “The partnership shouldn’t complete Form 4684 [Casualties and Thefts] for this type of casualty or theft. Instead, each partner will complete their own Form 4684.”⁵⁸

All of the court decisions and the IRS FAQs address who suffers the common–area property loss and relate to the distinction between a shared ownership interest such as co–tenancy in damaged real property and the ownership of stock in a separate tax entity such as a corporation that owns the damaged property. Merely owning an interest in the corporate entity that owns damaged property does not entitle the owner of that interest to a casualty loss under Sec. 165(c); rather, only the corporate entity that owns the damaged property itself would get the initial deduction. Passthrough tax concepts provide that items of income and deduction pass through to owners if the entity that owns the damaged property is a passthrough entity. However, none of the court cases nor any IRS guidance has dealt directly with what happens when the ownership interest is an interest in a passthrough entity such as a general or limited partnership, an S corporation, or an LLC.

An inference that can be drawn from the Form 1065 instructions is that, although the property under state law is owned by the entity, the individual LLC member’s (where the LLC is taxed as a partnership) or the individual partner’s share of a casualty loss passes through to the individual partners/members as either a personal casualty loss subject to AGI and dollar limits imposed by the Code or a business casualty loss. But the IRS has not issued a public ruling to confirm this point.

Accordingly, the use of a tenancy–in–common agreement (TIC) as described below is probably a more risk–averse strategy than use of a passthrough entity. Caution about using the passthrough–entity approach is particularly warranted in states that have adopted either the Uniform Limited Liability Company Act (ULLCA) or similar LLC statutes. Provisions in the ULLCA treat (1) the LLC as an entity distinct from its member or members;⁵⁹ and (2) an interest in an LLC as being only the right to receive distributions from the LLC, accordingly constituting only personal property without a direct interest in the company’s real property.⁶⁰ This could lead to an interpretation that a membership interest is considered personal property, not an ownership interest in specific LLC assets such as real estate. Similarly, some state statutes specifically provide that a “member of a limited liability company has no interest in any specific limited liability company property.”⁶¹ Thus, the ability of an LLC member to deduct their share of the LLC’s casualty loss might be questioned under the equity ownership premise found in the court decisions, given the LLC member’s lack of shared ownership in the actual casualty loss property.

Tax consequences of conversion to partnership taxation

The conversion of a corporation into an LLC is treated for tax purposes as a complete liquidation of the corporation. The liquidation of a corporation with appreciated assets can potentially result in double taxation — a tax to the corporation on the distribution of assets⁶²and another tax to the shareholders.⁶³ So, the appreciation in the common–area property of a long–standing planned community and the potential tax liability triggered by its recognition would likely be substantial, with long–term owners generally having more appreciation than new owners.

State-law limitations on type of entity that can be a homeowners association

A Montana Legislature study recently compared homeowners association laws for all U.S. states.⁶⁴In Florida, for example, a homeowners association must be organized as a nonprofit corporation.⁶⁵Most homeowners associations in California are set up as nonprofit mutual benefit corporations, but some may be structured differently.⁶⁶ The Davis–Stirling Act,⁶⁷ which governs condominium, cooperative, and planned–unit development communities in California, provides that an association for the purpose of managing a common–interest development may be either a nonprofit corporation or an unincorporated association.⁶⁸ Under the Uniform Common Interest Ownership Act, some form of which has been adopted in many states, management of a common–interest community is lodged in what is called a unit owners association. The association must be organized as a for–profit or nonprofit corporation, trust, LLC, partnership, unincorporated association, or any other form of organization authorized by the law of the state.⁶⁹ So, other than in states such as Florida where the type of organizational structure of the association is specifically limited by statute, the use of an LLC as the organization structure for a homeowners association is available.

But generally, the state common ownership acts provide alternatives to ownership of the common areas by the homeowners association. For example, the Uniform Common Interest Ownership Act implies that a common area could be owned by the unit owners as tenants in common and leased to the association. In fact, Washington state provides that “‘[c]ommon elements’ means … any real estate other than a unit … that is owned or leased either by the association or in common by the unit owners rather than an association” (emphasis added).⁷⁰Minnesota provides that “‘[c]ommon elements’ means all portions of the common interest community other than the units,” and “[a] common interest community shall be administered by an association … The membership of the association at all times consists exclusively of all unit owners.”⁷¹ The Uniform Planned Community Act, adopted only by Pennsylvania, provides that common elements include both common facilities and controlled facilities. A common facility can be owned or leased by the association or be designated as such by the planned community’s declaration or plats and plans recorded or referenced in the declaration. A controlled facility is any real estate within a planned community, whether or not a part of a unit, that is not a common facility but is maintained, improved, repaired, replaced, regulated, managed, insured, or controlled by the association.⁷² California Civil Code Section 4175(a) provides that a common area in a planned development “is owned either by an association or in common by the owners of the separate interests who possess appurtenant rights to the beneficial use and enjoyment of the common area.”⁷³

Possibilities for using a TIC or other strategies

Theoretically, a homeowners association that owns the common area of an existing planned community or the developer for a new planned community could transfer a deed to the common area to a co–owner group consisting of the community’s separate–interest holders. The co–owner group would then enter into a TIC agreement that details the terms of the relationship among the co–owners and their responsibilities for the property. The arrangement among co–owners is often a TIC, as described above. TICs began in California to allow for the joint ownership of apartment buildings or townhomes by their residents without the cost of converting such properties into condominiums.⁷⁴ But there appears to be no reason such arrangements cannot be used for common–area ownership of planned communities.

Even though TICs for buildings that are not planned communities do not require homeowners associations, a TIC that is a separate entity acting as its homeowners association may be beneficial.⁷⁵ The association would then enter into a lease of, or a management agreement with respect to, the common–interest property.⁷⁶

Whereas the transfer of the common area to a TIC among the residents would provide for a casualty loss deduction in the event of a future disaster, the transfer itself would have no adverse tax consequences. The tax exemption under Sec. 528 would be maintained for the association, as it would continue to be operated for the management, maintenance, and care of association property,⁷⁷ as “association property” includes property owned as tenants in common by its members.⁷⁸ And, the TIC would not be required to file a tax return because it is not a partnership for federal income tax purposes.⁷⁹ Where available, associations should investigate whether TICs would be beneficial to their owners’ needs.

If not, nothing seems to preclude homeowners from having both a condominium association that owns the common property in compliance with state laws anda separate LLC that is formed by owners and contracted to manage the day–to–day operations of the condominium, maintain the property in the same or better condition as when the contract commenced, handle leasing of any facilities to private parties, and/or indemnify the homeowners association against liability issues such as slips and falls.

The IRS does not appear to directly address a dual structure such as this. In such a case, the casualty loss would continue to go to the condominium association; however, the amount of the loss would be zero because of the indemnification clause with the LLC. The LLC would in turn be the entity bearing the loss, and using the check–the–box regulations to be taxed as a partnership, this loss would flow through to each condominium owner in proportion to their respective ownership share. Such an arrangement would arguably pass at least part of the casualty loss through as an ordinary loss because the loss originates from a contractual agreement rather than property rights. However, individual homeowners of condominiums may be relatively unconcerned with the casualty versus ordinary tax loss classification on their individual tax returns, given that without the dual structure, they would have no tax loss on the casualty of the common areas at all.

The IRS may object because a dual structure may effectively convert a loss stemming from a casualty into an ordinary loss, which is much less tax–restrictive. Indeed, the dual structure may have this effect. And, the dual structure has other business purposes beyond just a tax benefit, such as an added layer of liability protection, so any tax–motivated transaction assertion would seem to be inadequate. Further, there is a horizontal inequity question that the dual entity would seem to lessen: Individuals owning single–family homes in a qualified disaster area may take a casualty loss for the amount of their loss, which is often roughly their additional out–of–pocket expenses, subject to the loss limitations, whereas condominium owners in a qualified disaster area usually can take casualty losses only for the “studs in” portion of the loss (i.e., damage to the interior portions of the owner’s unit), even when their portion of the common, structural losses are significantly more. Some of the loss repairs may need to be capitalized, as with other casualties. Again, though, the dual–entity structure seems to be largely untested or even unsettled law, and we leave these questions for further examination under each individual state’s law.

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Footnotes

¹A casualty loss to personal use property is an itemized deduction, which generally cannot be claimed by a taxpayer who opts to use the standard deduction (Secs. 63(b) and 161).

²Secs. 165(h)(1) and 165(h)(2).

³Tax Cuts and Jobs Act, 2017, P.L. 115-97, §11044, codified as Sec. 165(h)(5)(A).

⁴Sec. 165(i)(5)(A). See also 42 U.S.C. §5122.

⁵FEMA, Disasters and Other Declarations.

⁶OBBBA §70109, codified as Sec. 165(h)(5).

⁷Id., Sec. 165(h)(5)(C).

⁸See, e.g., the Taxpayer Certainty and Disaster Tax Relief Act of 2020, P.L. 116-260, Div. EE, Title III, §304(b); the Further Consolidated Appropriations Act, 2020, P.L. 116-94, §204(b)(1)(C); and the Federal Disaster Tax Relief Act of 2023, P.L. 118-148.

⁹See IRS Publication 547, Casualties, Disasters, and Thefts (2025).

¹⁰See Cox, 371 F. Supp. 1257 (N.D. Cal. 1973), vac’d and rem’d, 537 F.2d 1066 (9th Cir. 1976); Hyde, T.C. Memo. 1981-480; Corcoran, T.C. Memo. 1976-222; Kennedy, T.C. Memo. 1973-15; and Oman, T.C. Memo. 1971-183.

¹¹Orr, T.C. Memo. 1960-147; Sas-Jaworsky, T.C. Memo. 1965-120, aff’d per curiam, 379 F.2d 337 (5th Cir. 1967) (denying casualty losses for property of a wholly owned corporation because there was no evidence that the corporate entity could be disregarded as a sham).

¹²See, e.g., Article 3 of the Uniform Common Interest Ownership Act (2021).

¹³See, e.g., Fla. Stat. §720.301(2) (“‘Common area’ means all real property within a community which is owned or leased by an association or dedicated for use or maintenance by the association or its members, including, regardless of whether title has been conveyed to the association“) (emphasis added); §§2-107(a)(3) and 1-103(2)(C) of the Uniform Common Interest Ownership Act (2021) (providing that the declaration creating a planned community must allocate to each unit in said community only a fractional percentage of the common expenses of the homeowners association and a portion of the votes in such association and providing that allocated interests in a planned community only include the “common expense liability” and votes in the association); §1-103(6) of the Uniform Common Interest Ownership Act (2021) (providing that common elements in the case of a planned community constitute only real estate owned or leased by the association); and Cal. Civ. Code §4175(a) (common area in planned development may be owned either by an association or in common by the owners of the separate interests who possess appurtenant rights to the beneficial use and enjoyment of the common area). See also Ardent Residential, “Who Owns a Development’s Common Areas?” (Sept. 29, 2023).

¹⁴See, e.g., Fla. Stat. §718.106(2); §§1-103(2)(A) and 2-107(a)(1) of the Uniform Common Interest Ownership Act (2021); and Cal. Civ. Code §4500. See also Ardent Residential, “Who Owns a Development’s Common Areas?“

¹⁵West, 163 F. Supp. 739 (E.D. Pa. 1958), aff’d per curiam, 259 F.2d 704 (3d Cir. 1958).

¹⁶Id. at 741.

¹⁷Keith, 52 T.C. 41 (1969).

¹⁸Id. at 47–48.

¹⁹Alphonso, 708 F.3d 344 (2d Cir. 2013), vac’g and rem’g, 136 T.C. 247 (2011).

²⁰Id. at 346.

²¹Id.

²²Id. at 347.

²³Id. at 348.

²⁴Id.

²⁵Id. at 354.

²⁶Id. at 352–54.

²⁷Id. at 350, quoting National Bank of Commerce, 472 U.S. 713, 722 (1985) (“[I]n the application of a federal revenue act, state law controls in determining the nature of the legal interest which the taxpayer had in the property”).

²⁸Id. at 352, citing State Tax Commission v. Shor, 43 N.Y.2d 151, 154 (1977).

²⁹Id. (citing Estate of Carmer, 71 N.Y.2d 781, 784, 570 N.Y.S.2d 88, 89 (1988)).

³⁰Id., citing Shor at 154.

³¹Id. at 354.

³²See, e.g., Fla. Stat. §718.104(i) (2024).

³³Rev. Rul. 74-99.

³⁴Secs. 528(a), (b), and (d).

³⁵Sec. 528(c)(1).

³⁶Regs. Sec. 1.528-1(a).

³⁷Id.

³⁸Regs. Secs. 1.528-2, 1.528-5, 1.528-6, 1.528-7, and 1.528-4.

³⁹Regs. Sec. 1.528-3.

⁴⁰Regs. Sec. 1.528-9.

⁴¹Sec. 528(d); Regs. Sec. 1.528-10.

⁴²Regs. Sec. 1.528-8; Instructions for Form 1120-H, U.S. Income Tax Return for Homeowners Associations (2025).

⁴³Sec. 528(b).

⁴⁴Sec. 528(c) requires only that a homeowners association be an organization.

⁴⁵See IRS Private Letter Rulings 200034006 (May 17, 2000); 200344017 (July 9, 2003); and 200652004 (Sept. 12, 2006), all citing Rev. Rul. 90-36.

⁴⁶Rev. Rul. 90-36.

⁴⁷Instructions for Form 1120-H; Regs. Sec. 1.528-8. See also Regs. Sec. 301.7701-3(c)(1)(v)(A).

⁴⁸See Regs. Sec. 301.7701-2.

⁴⁹Regs. Sec. 301.7701-3(b)(1).

⁵⁰Sec. 703(a) and Regs. Sec. 1.703-1(a).

⁵¹Regs. Sec. 1.702-1(a)(8)(iii).

⁵²Sec. 702(a)(7).

⁵³Sec. 702(a)(8).

⁵⁴Sec. 165(h)(2)(A)(ii).

⁵⁵Compare Sec. 165(c)(1) and Sec. 165(c)(3).

⁵⁶Regs. Sec. 1.702-1(a)(8)(ii).

⁵⁷Instructions for Form 1065, U.S. Return of Partnership Income (2025).

⁵⁸Id.

⁵⁹ULLCA §108(a) (2013).

⁶⁰Id. at §§102(24) and 501.

⁶¹Fla. Stat. §605.0110. See also, e.g., Wash. Rev. Code §25.15.246(1) (“A member has no interest in specific limited liability company property”).

⁶²Sec. 336.

⁶³Sec. 331. The exemption for distributions of housing units to shareholders of a cooperative housing association would not apply. See Sec. 216(e).

⁶⁴Sherley, HOA Governance in Other States, Montana Legislature Office of Research and Policy Analysis (January 2024).

⁶⁵Fla. Stat. §720.302(1). Condominium associations may be either a not-for-profit or a for-profit corporation but cannot be an LLC (Fla. Stat. §718.111(1)(a)).

⁶⁶California Department of Justice, Homeowners Associations.

⁶⁷Cal. Civ. Code §§4000–6150.

⁶⁸Cal. Civ. Code §4080.

⁶⁹Uniform Common Interest Ownership Act §3-101 (2021).

⁷⁰Wash. Rev. Code §64.90.010(7).

⁷¹Minn. Stat. §§515B.1-103(7) and 515B.3-101.

⁷²See, e.g., 68 Pa. Cons. Stat. §5103.

⁷³See also Fla. Stat. §720.301(2) (“‘Common area’ means all real property within a community which is owned or leased by an association or dedicated for use or maintenance by the association or its members … regardless of whether title has been conveyed to the association”). For other state statutes, see Sherley and accompanying text, above, note 64.

⁷⁴See Khouri, “You Can Buy ‘Cheap’ in L.A. But You Won’t Own Your Home and May Oust a Renter,” Los Angeles Times (Dec. 30, 2019).

⁷⁵See Sirkin, “Starting and Operating a TIC Homeowners Association,” SirkinLaw.

⁷⁶Uniform Common Interest Ownership Act §2-101 provides that the recorded declaration creating the common-interest community must be indexed in the name of the common-interest community and the association.

⁷⁷Regs. Sec. 1.528-2.

⁷⁸Regs. Sec. 1.528-3(a).

⁷⁹Regs. Secs. 1.761-1(a) and 301.7701-1 through 301.7701-3 provide that a federal tax partnership does not include mere co-ownership of property where the owners’ activities are limited to keeping the property maintained, in repair, rented, or leased. If the TIC is a pure co-ownership and the owners are individuals, each owner reports their share of rental income and expenses directly on a Schedule E, Form 1040, U.S. Individual Income Tax Return. 

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Contributors

Patrick H. Lucas, J.D., LL.M., is an assistant professor of accounting at the University of West Florida in Pensacola, Fla. Brian Elzweig, J.D., LL.M., is a professor of business law and research fellow of the Askew Institute for Multidisciplinary Studies at the University of West Florida in Pensacola, Fla. Valrie Chambers, Ph.D., is an associate professor of accounting (retired) at Stetson University in DeLand, Fla. For more information about this article, contact thetaxadviser@aicpa.org.

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