I'm selling my primary residence (which I previously rented for two years) and I'm trying to avoid unnecessary recapture on the depreciation. The exact details of my situation are as follows (numbers are made up but give the idea).
- The initial cost basis for the house (based on purchase price, etc.) was $275,000.
- After the two year rental period, this was reduced to $255,000.
- I am now selling the house (FSBO) for $275,000. HOWEVER, the HOA has approved plans to build a new fancy roof. They are expecting to have a special assessment in the range of $20,000 to $25,000 which has not yet been determined. As part of the initial negotiation I agreed to cover those costs for the new owner. In particular, even after depreciation, I will be even or at a loss. The intention was to put 25K into escrow for some period of time (18 Months was proposed?) to cover that special assessment, at least up to 25K.
Now if I could just pay the special assessment before I left I think it would count as a capital improvement and change my cost basis. In particular it would mean that my cost basis is at least $275,000 and so I would not be subject to any recapture with the current selling price. But I don't know how that would work on my taxes with the money in escrow. Given the competence of my HOA, the special assessment could happen before I leave or not for 12 months or so.
My question: Since the contract was just signed and we are now in attorney review, and since I am on the hook for the assessment, is there a way of setting up the contract/escrow in a a way that would help me avoid recapture? I would prefer to just reduce the price, but the board insists that if people sell their condo after they make their decision then the sellers are responsible for the assessment.