A recent Tax Court case serves to point up one of the distinctions between owning your home outright and owning your home through the ownership of shares in a residential cooperative corporation (“coop”). If you own your home outright, and it sustains sudden damage, the cost of repairs usually gives rise to a casualty loss deduction, subject to certain limitations. In Alphonso v. Commissioner, (March 16, 2011), the taxpayer was a shareholder in a residiential co-op. A retaining wall collapsed and the shareholders were assessed the cost of repairs. The taxpayer claimed a casualty loss for the amount of her assessment. The IRS disallowed the deduction on the basis that the loss was suffered by the co-op and the co-op, rather than the shareholders, was the proper party to take any deduction for the loss.

The Tax Court agreed with the IRS. The court pointed out that IRC Section 216 specifically passes through to the shareholders the deduction for real property taxes and interest expense incurred by a co-op. All other expenses incurred by a co-op are deductible only by the co-op and not by the shareholders. The deductions for interest expense and property taxes are the primary tax deductions associated with home ownership. For these deductions, the shareholder of a co-op is treated the same as an outright owner. It is only in the rarer case in which a casualty loss occurs on the property that the distinction becomes relevant.