Can Co-op Owners Deduct Casualty Losses?

Co-op owners can deduct shared casualty losses for common areas. Find out how and why.

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In recent years, property owners all over the country have suffered billions in casualty losses--that is, damage to property caused by sudden events like floods, earthquakes, and storms. Not all casualty losses are fully insured or insured at all. However, a property owner who pays for casualty losses out of his or her own pocket may deduct that cost.

Where common areas of condominium developments suffer uninsured casualty losses, the individual unit owners may deduct the amount of any special assessments imposed on them by their homeowner's association to pay for repairs. This makes sense since each individual owner is a property owner with a deed giving him or her a fractional interest in the common areas.

But what about stock-cooperatives? Unlike the case of condominiums, coop owners receive no deed to a specific unit or interest in common areas. Instead, each owner obtains shares of stock in a cooperative corporation that owns the building. Along with the stock comes the exclusive right to occupy a unit under a proprietary lease and use the common areas.

Arguably, owners of stock cooperatives are shareholders in a corporation, and the coop is the property owner. Losses incurred by a corporation are not normally deductible by its stockholders. At least, this is what the IRS tried to claim when it refused to allow one coop owner to take a casualty loss.

The IRS case involved the Castle Gardens Cooperative, a 589-unit coop on Manhattan's Upper West Side. The coop had to pay $25 million for repairs after a 70-foot high retaining wall collapsed onto the Henry Hudson Parkway below. Each coop owner was assessed about $26,000 to pay for the repairs. Christina Alphonso attempted to deduct the assessment as a casualty loss on her tax return. The IRS denied the deduction. It argued that Alphonso could only deduct casualty losses to her individual unit, not to the shared retaining wall. The tax court agreed with the IRS, holding that the stock cooperative owned the retaining wall, not any of the individual shareholders.

However, the determined Alphonso appealed to the Second Circuit Court of Appeal and won. The Appeals Court held that under New York law a stock cooperative owner's exclusive right to use the common areas, shared solely with the other coop owners and their guests, qualified as a real property ownership interest. As such, each coop owner could deduct his or her share of casualty losses to the common areas. (Alphonso v. Comm'r., 11-2364-ag (2d Cir. Feb. 6, 2013)).

Stock co-operatives account for only about 6% of common interest ownership housing and about 1% of all housing units. So this decision won't have a far-ranging nationwide impact. But it will be important in places like New York City that still have large numbers of stock coops and that have suffered substantial casualty losses from recent natural disasters.

To learn more about the tax definition of a casualty loss, see Nolo's article, What Constitutes a Casualty Loss?

March 2013

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