Does an HOA owe federal tax when selling a foreclosed unit?

Question

A condo HOA where we have a number of units and where I sit on the board is being told by our accountant that we owe tax on the profit on the sale of a unit owned by the Association.  The Association has owned it for a number of years after foreclosing on it during the global financial crisis for unpaid dues and fees.  I've Googled and read many articles that say the HOA does not owe tax on the substantial capital gain that the HOA enjoyed when we sold, but our accountant says it's clear that we do.  Proceeds from the sale were put into reserves and subsequently mostly spent on needed concrete parking lot replacement work, and we haven't budgeted for the tax payment we're being asked to pay.  Can any CPA with the proper background (with the caveat of course that you're not giving legal advice) comment on this topic?  Thanks in advance.

Christopher Phillips · Answer

@Ken P.

This is discussed under Technical Advice Memorandum 9637007. Since the sale of the unit goes against member income, and buyers of the foreclosed unit must become members to do so, TAM 9637007 holds that the Association must pay capital gains on the sale since it's part of member income.

Ken P. · Answer

Thanks for all the helpful replies everyone.  We (the HOA Board) went ahead and paid the tax.

James Miller · Answer

If it sounds too good to be true... it is. HOA is likely going to owe cap gains on the difference between your basis and the sale price otherwise that loophole is so large we lawyers and CPAs would find strategies to structure deals with HOAs and "sham" foreclosures to get tax free capital gains.

Wayne Brooks · Answer

@Gilbert Dominguez You’re confusing apples with oranges a little bit here.  If the property sold for more than owed At The Foreclosure auction, then the owner would be due the surplus.  This is not the case here.  This is the same as any other buyer/investor buying at the foreclosure auction, then selling years later....nothing due to the previous owner.

Gilbert Dominguez · Answer

Huuummmjm. I would think that similar as in a tax lien sale the HOA had the right to sell the unit to recover its dues oweds but that what you call equity gains actually belonged to the person from whom the association took the property. I would also assume at this point that whatever statuit of limitations has elapsed and the person who lost their property due to the HOA sale can not longer make any claims for the overages, but shame on you and the other HOA members for not thinking to notify the person who lost their home to you. I suppose this is something that you also woule not like to hear.

In my personal opinion paying taxes on the full amount of your gains is the least that should happen to you. What I am thinking for you and your HOA has something to do with fire and burning for eternity.

Christopher Smith · Answer

try searching:

Saving an Association $60,000 in taxes based on a chance conversation

Ken P. · Answer

Thanks for the rapid response with documentation, even though it's not what I wanted to hear.

Does an HOA owe federal tax when selling a foreclosed unit?

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