By Robert S. Kutner, Esq.
Partner, Casner & Edwards
Changes to the Massachusetts Tax Code create new tax burdens and expense for unincorporated condominium associations for tax years beginning on or after January 1, 2009. Those changes were signed into
law by Governor Deval Patrick in July 2008 and are part of a lengthy tax bill entitled, “An Act Relative to Tax Fairness And Business Competitiveness,” which was intended to eliminate many tax loopholes
under the current tax code.The Purpose for Reform
According to the Department of Revenue, the purpose of the tax reform legislation was to tighten the rules for business partnerships and trusts. Under prior law, those entities had the right to select the tax designation that was the most favorable when filing their Massachusetts income tax returns.
By contrast, under federal law, condominium associations have been required to pay federal income tax at the same rate as corporations, although corporate tax law principles do not apply. Massachusetts tax laws had been more flexible, as an unincorporated condominium association had the ability to elect whether or not to file its state tax return as a corporation. As a result of the legal changes, the filing status of condominiums in Massachusetts will have to conform to federal filing status. All condo associations will have to pay income tax of at least $456, the minimum income tax due from a corporation. That impact on condominium
associations, however, will not be the only effect.Complying with New Regulations
Smaller associations, such as those with two to four units, may have difficulty complying with the recordkeeping and filing requirements for corporations. Preparation of a balance sheet is likely to be required. All
condominiums will be required to file state Form 355 which is more detailed than Form 3M. Therefore, it may be more difficult for the association’s
treasurer to handle income tax returns without professional assistance from a qualified accountant, and small unincorporated condo associations will incur additional fees for these professional services as well as additional
Larger condominium associations, particularly those with greater reserves for capital improvements, are likely to have to pay increased taxes. According to the Department of Revenue, condo reserves will be taxed at
the rate of .0026%, meaning, for example, that an association with
reserves of $2 million will pay tax of $5200 annually.
It is common that reserve funds may be held in an account for several years before being spent. During that time, they will be taxed annually as part of the net worth of the condominium. For example, if a portion of monthly fees is allocated for longterm repairs to the roof or heating system, those funds could be held for 10 years or longer, during which time annual taxes would be due. Based on the new law, any association with more than $175,384 in reserves will have to pay more than the minimum of $456 ($175,384 x
.0026) annually. Another change in the law is that interest income of the condo association will be taxed at the rate of 9.5% instead of the personal rate of 5.3%.
Some attorneys view the impact of the tax law changes as contrary to state policies that encourage condominiums to keep adequate funds in reserve.
One example is the 1993 Massachusetts adoption of a “super-lien” that protects collection of fees from owners in foreclosure (General Laws
Chapter 183, Section 400). The law gives the association priority
to collect up to six months of overdue condo fees, just behind taxes and municipal debts, but ahead of mortgages. Condo liens are given priority even if the mortgage was recorded at the registry of deeds before the condo
For specific advice, condo associations should contact their attorney or accountant. The Massachusetts Department of Revenue has issued a “Technical Information Release” concerning these changes, TIR 08-11 which can be found at www.mass.gov
.Data Security Regulations-Update
To update my recent column on the new Massachusetts Data Security Regulations, the effective date of those new regulations has been delayed. They will go into effect on March 1, 2010. There are also federal
regulations governing data security. Some of those laws are in effect now. Others become effective shortly. The Federal Trade Commission advises that it will begin enforcing the federal regulations, known as its “Identity Theft Red Flag Rules” on November 1, 2009.
The federal regulations implement a comprehensive law that was passed in 2003 to protect financial information. If a real estate agent provides credit as part of his or her business, or if the agent regularly “arranges” for credit to be extended, he or she is considered a “creditor” and must comply with the federal regulations. Creditors must have policies in place to ensure that there is a method to investigate any discrepancy in information. For example, if there’s a discrepancy between the address in a credit report and the address provided by the consumer, a creditor must implement a procedure to verify whether the report relates to the customer or another individual. If the discrepancy is resolved and correct information is verified,
the creditor must have a procedure to notify the consumer reporting agency.