If you’ve bought a home or a condo, you’re probably paying a monthly fee to your homeowners’ organization. This HOA fee is intended to support repairs and maintenance on the exterior of your home or in community areas. While many homeowners wish they could use HOA fees to reduce their taxable income, the actuality differs depending on the circumstances. So, are HOA fees tax deductible on a home or rental property? Discover more by reading on.
What is an HOA fee?
The property management business collects a homeowner’s association fee, or HOA fee, from all property owners in the community. The fee could be paid monthly or quarterly.
HOA fees cover the price of basic upkeep, property renovations, and common areas such as parking, roofing, and landscaping. Other amenities, such as community clubhouses or pools, are also covered by the fees. HOA fees differ from property to property and are determined by maintenance costs and property prices.
How to Determine Whether a Property Has HOA Fees
HOA fees are widespread in condominiums and townhouses, but they can also be found in single-family homes in neighborhoods. A realtor can assist you in determining whether a property you’re interested in requires an HOA fee.
Before you buy a property, you should understand what fees you will be responsible for paying on a monthly or annual basis. HOA fees might rise over time and may not cover all repair costs for your unit. Make certain that you and your realtor thoroughly investigate and comprehend the provisions of any HOA agreement.
Are HOA Fees Tax Deductible?
When tax season arrives, you can almost hear the collective moans of homeowners everywhere. However, the grief is understandable. You already have a lot of bills to pay — water, electricity, HOA dues, and so on — so taxes can feel like an extra financial burden. It would be ideal if at least one of these were tax-deductible.
It’s natural to question if HOA fees are tax-deductible. After all, it’s something you have to pay for on a regular basis, and the cost may quickly build up over the course of a year, especially if your HOA fees are high.
So, are HOA fees deductible? The answer to this question is not as straightforward and can vary depending on a variety of factors. Let’s take a look at each one individually:
#1. Private or personal year-round home
If you use your property as a private home — and you use it as your primary residence year-round — the homeowner’s fee cannot be deducted from your taxes.
This is due to the fact that your HOA is considered a private company. Even if a portion of the fees is intended for shared areas, the IRS considers your entire fee to be non-deductible.
The majority of homeowners fall into this category. Although the fee is not tax-deductible in this case, many other home-related expenses are. These can include mortgage interest and property taxes. Consult a tax professional to determine which deductions you are still eligible for as a homeowner.
#2. Use of Your Home or Condo as a property Rental
HOA fees are not tax-deductible if you live in your home all year, but what if you rent it out? Are HOA fees for rental property tax deductible? This is when things start to become a little more difficult.
Some property owners prefer to rent out their homes or apartment to tenants. If this is the case for you, the regulations alter instantly.
Because the IRS considers an HOA fee to be a required cost of property maintenance, any property used as a rental property is eligible for a tax deduction on the HOA fees. HOA fees, in other terms, are deductible as a rental expense.
You do not have to rent out your entire home for HOA fees to be deductible. You can deduct a percentage of your HOA fees if you just rent out a piece of your home, such as a garage or basement.
On rental properties, there is an exemption to the norm. Special assessments for upgrades are not deductible on your tax return. The HOA often charges special levies to cover unanticipated situations or emergencies. This could be the result of a natural disaster or another unforeseen event that is not covered by insurance or an HOA’s reserve fund. The special assessment is typically tax-deductible if it is spent for repairs or upkeep. However, if it is utilized for upgrades, it is not tax-deductible.
If you rent out your home or condo to tenants, make sure to include a Schedule E form when you file your taxes each year. When in doubt, seek the advice of an accountant.
#3. Use of Your Home or Condo for Commercial Purposes
If you use your home or apartment for business purposes, the tax requirements may be different. While you cannot deduct the entire HOA fee from your taxes, you can deduct a portion of it. This is especially if you itemize. Any percentage used in association with this company or office may be tax-deductible.
This guideline also applies if you merely have a small home office. For example, if you utilize 10% of your home as an office, 10% of your HOA fees are deductible. Mortgage interest, property taxes, and even utilities are all tax-deductible. Again, if you have any questions, it is best to seek the advice of a specialist.
#4. Use of Your Home as a Second Home or Vacation Property
Some property owners just use their homes as holiday homes. This means that they do not occupy it for the majority of the year, instead opting to rent it out for the remaining unused months.
When it comes to HOA tax deductions, this type of setup is a one-of-a-kind situation.
If you fall into this group, the IRS will only consider the months that your property is used as a rental property to be eligible for a tax deduction for HOA fees.
If the home is rented out for six months out of the year, the fees paid during that period are tax-deductible, but fees paid while you live in the home are not.
Are HOA Fees for Rental Property Tax Deductible?
Yes, if you utilize your home as a rental property, you can deduct your HOA fees from your taxes. The IRS considers HOA fees to be a rental expense, so you can deduct them from your taxes. As a result, if you utilize your home only as a rental property, you can deduct 100% of your HOA fees.
Rental property tax breaks are also available if you merely rent out a piece of your home, such as a basement apartment or garage. In that situation, you can deduct a portion of your HOA fees equivalent to the percentage of the home you rent out.
If you use the property as a rental on a part-time basis, the principle remains. For example, if you live in the property 50% of the time and rent it out the other 50%, you can deduct 50% of your expenses, including HOA fees.
What about condominium fees? Is it tax-deductible to pay condo fees on a rental property? Yes, you can deduct condo fees from your taxes if you rent out your condo unit. It functions in the same way as HOA fees do.
What Expenses Can You Deduct When Owning a Rental Property?
Aside from HOA or condo fees, you may deduct other expenses from your taxes if you rent out the property. Your property tax, mortgage interest, depreciation, operating expenditures, and maintenance are all included.
Ordinary and necessary expenses for the upkeep and management of your rental property may be deducted. Ordinary expenses are expenses that are commonly recognized in the business. Interest, taxes, insurance, utilities, maintenance, and advertising, on the other hand, are examples of necessary expenses.
Although you can deduct the cost of materials used for rental property upkeep and repair, you cannot deduct expenses for renovations.
Can You Deduct Special Assessments on Your Taxes?
This is another question that many homeowners have. Are assessments deductible for tax purposes? Special assessments are usually levied by homeowners’ organizations to cover unexpected expenses. As a general rule, special levies on taxes cannot be deducted. If you rent out your property, you may be entitled to deduct the assessment if it is spent on maintenance and repairs. However, it is not tax-deductible if it is utilized for upgrades.
Is It Possible To Deduct HOA Fees If You Work From home?
Yes, if you use your home as an office, you can deduct your HOA fees. This is an example of an exception to the rule.
You can deduct certain expenses linked to your home office, such as HOA fees. It is crucial to note, however, that even this exception has criteria.
For starters, under the Tax Cuts and Jobs Act, you must be self-employed to qualify for this advantage. If you are employed and only work from home, this does not apply to you.
Your home office should also be your primary location of work. That is, it should be the location where you do administrative work or meet with customers.
It should also be a defined location in your home. It might range from a single corner desk to a full room. However, it cannot be as simple as using your laptop on your bed or sofa. In the event of an audit, you may also be required to provide photographic evidence to support your claim of a home office.
You can deduct expenses that are proportionate to the percentage of your home office. For example, if you claim that you use 10% of your home as an office, you can deduct 10% of your costs. Property taxes, mortgage interest, utilities, repairs, and HOA fees are all included.
How to Deduct HOA Fees
Your circumstances will determine where and how you will deduct HOA fees.
Understanding and calculating the home office deduction might be difficult. You should look into the requirements to make sure you meet them. IRS Publication 587 can assist you in determining whether the simplified or conventional procedure will save you the most money. The home office expense will subsequently be listed on Schedule C.
Part 1 of your Schedule E can be used to list your rental revenue and expenses if you are a landlord. However, determining the deductible amount may be more difficult if you just rented the home for a portion of the year.
In any scenario, it may be beneficial to consult with a competent tax attorney or accountant who can provide you with tailored counsel. They may also be able to provide you with tax planning advice in order to decrease the amount you owe in the future.
Keep Track of Your HOA Tax Deductibles
When it comes to owning a home or condo in a homeowners association, taxes can be confusing. Are HOA fees deductible? Fees are not, in general, tax-deductible. However, as you are now aware, there are several exceptions.
Filing your taxes can be a financial burden. It is your job as a homeowner to understand when your HOA fees are tax-deductible and when they are not. This allows you to avoid any potential issues in the future.
When in doubt, it is always a good idea to consult with a tax specialist about your specific circumstances to ensure that you are receiving the most tax advantage. We are only a phone call away if you have any questions or require additional assistance.
