Tax deductibles can save you a couple of dollars, especially if you have other expenses taking up a bulk of your income and would like to salvage as many pennies as you can. Most homeowners already have multiple monthly expenses and paying Home Owners Association (HOA) dues after tax has been deducted could be a lot.
If you could deduct these fees from your taxes, increasing your disposable income, it could end up making a big difference to your life. Unfortunately, there are only limited situations in which HOA fees become tax-deductible. Let’s look at when HOA fees are tax-deductible, why they are deductible, and how you can navigate the process.
In general, HOA fees are not tax-deductible. They cover routine maintenance that would be covered by a private homeowner in a non-HOA residence. HOA fees can be partially deductible for self-employed people with home offices. They are partially or wholly deductible if the house is rented out.
HOA Fee Not Deductible for Private Residence
HOA fees are not tax-deductible for any property that does not serve a commercial purpose. This means that you cannot deduct HOA fees from your tax if a property serves as your personal residence all year round.
Even if you have multiple houses and cannot occupy all of them throughout the year, as long as its sole purpose is personal, the Internal Revenue Service (IRS) doesn’t permit tax deductions.
You would still have deductions on house fees like property taxes and mortgage interest. However, the monthly dues paid to your HOA for the maintenance and improvement of your property would have to be paid with the money left after tax and other fees have been removed from your income.
Reasons for Prohibition
Although you can deduct state and local real estate taxes, HOA fees aren’t tax-deductible for private residences. This is because the IRS views dues in this situation as assessments demanded by a private entity. To understand this, you have to first recognize the functions of HOAs.
An HOA is usually set up in condo buildings, subdivisions, or planned communities; basically, communities that share amenities or structures. The purpose of HOA fees is to help improve or maintain these shared amenities.
The amenities shared by residents can range from swimming pools, fitness centers, and parking lots to function halls, parks, and playgrounds. The fees are only in place because of the collective usage of these amenities. Thus, the convenient way to ensure that everything runs smoothly is to levy homeowners and use the money to meet the community’s needs.
People who do not live in neighborhoods with HOA cover similar responsibilities without even considering tax deductions. For example, if they own a swimming pool or playground on their property, they’d have to shoulder the cost of maintenance alone. It’s just another responsibility that comes with being a homeowner.
Similarly, regular (non-HOA-related) gym membership fees factor in maintenance costs, and if a person were to set up a home gym, they would pay for the equipment and upkeep of the equipment anyway.
Working From Home: Portion Becomes Deductible
Now, there are some cases in which your HOA fees, or at least a portion thereof, become tax-deductible. Let’s start with when you are working from home.
A deduction is only permissible for self-employed individuals who are working out of their homes. If you are an employee working away from the office then you aren’t eligible for a deduction based on your working from home status.
For you to qualify, you’d have to meet the approved Internal Revenue standard for a home office. Photographic evidence might be required, so if your sitting room couch is your home office, then you might not be eligible for a deduction.
The general practice is to make deductions based on the percentage of your home employed as your office. So, if you use your bedroom as your home office and you estimate the space to be 25% of your house, you can deduct 25% of your HOA fees. In the case of an IRS audit, your estimation should be as accurate as possible.
The IRS allows for deductions even if you conduct business in a different location sometimes. The most important thing is that you regularly meet physically with clients in your house and that the use of your home is pivotal in the running of your business. You can qualify for deductions if you meet the requirements for either the exclusive use, regular use, or trade/business use of your home office.
Thus, professionals like attorneys and doctors that have a home office could benefit from this deduction.
If you are in the wholesale or retail business and use part of your house for storing/warehousing, you might be able to deduct a percentage of your HOA fees. Like home office deductions, it would be made based on the portion of the house that you use for business purposes.
Other Home-Business-Related Deductibles
If a portion of your home is used as an office, the IRS permits deductions on the following:
- Telephone and Internet
Repairs that affect your business can be deducted. For instance, if you repair the HVAC system in your home and your home office takes up 10% of your space, you can deduct 10% of the repair cost. However, permanent improvements that increase the value of the property aren’t tax-deductible.
You can deduct the percentage of your bills that focuses on the telephone and internet expenses of your business.
Expenses on utility and services like electricity, gas, and trash removal can be written off. However, like all the other expenses we’ve discussed, you can only deduct the percentage that covers your home office.
If you are a tenant, then you can deduct the percentage of your house rent that covers the estimated cost of the space your home office covers.
Can Deduct Fees if Property Is Rented Out
HOA fees are tax-deductible if your house is used for commercial purposes. Property rental counts as a commercial venture, thus, HOA fees in this instance can be partially or completely written off as a rental expense.
To facilitate the deduction, you would have to fill out Schedule E of your tax return form.
If you own multiple rental properties in HOA communities, you can apply for an HOA fee deduction on each property.
Reasons for Allowance
The primary function of HOA is the maintenance and improvement of amenities in a neighborhood. Unlike private residences, where the fees benefit the homeowner directly, for rental properties, the homeowner might not enjoy the amenities that the HOA fees provide.
For rental properties, the IRS sees HOA levies as necessary expenses for maintaining a rental property. The dues are regarded as rental expenses, hence the allowance for deductions.
Since the HOA dues recognized by the IRS are targeted at the maintenance and repair of amenities in the neighborhood, the IRS doesn’t allow deductions in fees for the replacement or improvement of amenities and structures.
HOA fees are usually paid regardless of the occupancy status of the apartment. However, you can deduct all or a percentage of the levies if you utilize the apartment for rental purposes.
Other tax-deductible rental expenses include:
- Mortgage interest
- Operating expenses
- Property tax
Community Improvement or Additions Are Exempt
Although you can deduct HOA fees for rental properties, the IRS does not permit the deduction of special assessments. Therefore, if there are additional charges for improving or replacing amenities, they cannot be written off from your taxes.
So, for instance, if your community decides to build a swimming pool or to make upgrades to the tennis court, the levies that this development would attract cannot be removed from your taxes.
The general rule of thumb is to deduct basic HOA fees targeted at the maintenance of the property. Any fee that doesn’t fall under this category is likely to improve the property value, thus it cannot be written off.
An alternative way to recoup the money spent on HOA improvements and additions is to take depreciation on your house. Depreciation lets you to recover the cost of a property over a period of years.
Not Option if Renter Pays HOA Fees
If you own a rental property, there are still additional conditions that must be met before you can deduct HOA fees from your tax. One of them is that you must be responsible for the payments.
So, if you have an agreement with your tenants where they are responsible for paying monthly property levies like HOA fees, it cannot be written off from your taxes.
If the arrangement with your tenant is beneficial to you, then it isn’t a bad thing because it takes the burden of paying the monthly, quarterly, or annual levies completely off your back.
However, in most cases, landlords add the cost of HOA fees as well as additional expenses that might be made to the rent. This way, you might be the person paying, but ultimately, it is still the renter’s funds.
If you have a vacation home or a house that you use occasionally and rent out the rest of the time, you might be able to deduct a percentage of the HOA fees.
The rule is to deduct the fees that cover the period when the property is rented out. This means that the fees aren’t deductible for the period that you live in the house and even if the property is unoccupied, the HOA dues cannot be written off if the property isn’t listed as a rental.
With that in mind, if you live in the apartment from October to December but rent it out the remaining months of the year, then you can only deduct the HOA fees for January to September.
Therefore, if you pay your HOA fees annually, you can deduct 75% of the fees from your tax if you live in the house for 3 months and use it as a rental for 9 months.
In a situation where you rent out a portion of the house that you live in, only a percentage of the HOA fees becomes deductible.
For instance, if you rent out your basement or a room in your house, you can deduct the HOA fee to correspond with the percentage of your home that’s used as a rental.
If the portion of your house that’s used as a rental is estimated to be 30% of the property, you’d only be able to deduct 30% of your HOA fees.
To do this, you’d have to first determine the percentage of your home that you’re renting out.
I do need to note here that HOAs are not always very happy to have you renting out your property. There are good reasons for this, but it can be frustrating, especially when you use the home for personal use for a portion of the year, so you cannot or do not wish to sell it, but you want to try and recoup some losses for when it is not in use.
Rules May Differ Across States
The IRS is the federal body that manages tax payments and all states in the United States work in line with IRS laws.
However, tax systems vary based on state laws. Your state might have special requirements that don’t apply in other states, so it’s best to apprise yourself of what is applicable in your area before you proceed.
I have written a guide on HOA fee tax deductions in California.
Consult Tax Professional for the Best Information
Though it would cost you, it might be worthwhile to consult a tax professional. Meeting with a professional ensures that you have the best information for the area you live in before you proceed with your tax returns.
You could also employ an expert to do your taxes for you, especially if you are employing the itemized system and are feeling overwhelmed by the process.
Other Property Fees that Are Tax Deductible
As I have mentioned, even though you cannot deduct your HOA fees, there are still other property-related deductions available to you.
The laws guiding federal tax deductions have changed repeatedly in recent years. For now, deductible property fees include:
- Mortgage insurance premiums (MIP)/ Private Mortgage Insurance (PMI).
- Home mortgage interests.
- State and local real estate taxes.
Anyone taking standard tax deductions isn’t eligible for PMI deductions. To be eligible for PMI deductions, you’d have to follow the necessary requirements and also employ an itemized deduction system on your return.
Another factor that can affect your eligibility for deductions on MIPs is your Adjusted Gross Income (AGI). For married couples filing separately, the AGI limit is $54,500. However, for an individual filing, you can only be eligible if your AGI is less than $109,000 annually.
Home mortgage interests are a popular deductible property fee. The deduction can either be taken as a standard or an itemized deduction. You’d have to decide on what method saves you the most money.
The IRS allows for deductions on the first $750,000 ($375,000 for married people filing separately) of home mortgage interest for debts incurred after December 16, 2017. For debts incurred before December 16, 2017, the limit is $1,000,000 ($500,000 for married couples filing separately).
The IRS permits deductions on state and local charges/fees that are targeted at the public’s welfare. The 2017 Tax Cuts and Job Act limits the deduction on state and local taxes to $100,000. That means $5,000 for married couples filing separately.