Tax deductibles can save you a couple of dollars, especially if you would like to salvage as many pennies as you can. Most homeowners already have a lot of monthly expenses, and Home Owners Association (HOA) dues can sometimes be a strain.
In case you’re wondering if you can increase your disposable income by deducting your HOA fees from your tax, then read on. In this article, I provide information on when HOA fees are tax deductible, why they are deductible, and how you can navigate the process.
HOA Fee Not Deductible for Private Residence
Any property that does not serve a commercial purpose cannot be tax deductible. Even if you have multiple houses that you do not occupy all through the year, as long as they are solely used for residential purposes, the Internal Revenue Service (IRS) doesn’t permit tax deductions.
You can still have deductions on 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 purpose of Home Owners’ Associations. An HOA is usually set up in condo buildings, subdivisions, or planned communities, basically, communities that share amenities. 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 the amenities so the convenient way to ensure that everything runs smoothly is to levy residents and use the money to meet the community’s needs.
With that out of the way, people who do not live in HOA communities cover similar responsibilities without even considering tax deductions. It’s just another responsibility that comes with being a homeowner. For instance, if they own a swimming pool or playground on their property, they’d have to shoulder the cost of maintenance alone.
Other Property Fees that Are Tax Deductible
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 Mortgage Insurance Premiums is your Adjusted Gross Income (AGI). For married couples filing separately, the AGI limit is $54,5000. 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 0000 ($500 000 for married couples filing separately).
The IRS allows for any deduction on state and local charges/fees that are targeted at general public welfare. The 2017 Tax Cuts and Job Act limits the deduction on state and local taxes to $ 10,000. That means $5000 for married couples filing separately.
Working From Home: Portion Becomes Deductible
A deduction is only permissible for self-employed individuals. If you are working remotely for an employer 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’d not be eligible for a deduction.
The general rule of thumb 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 home, you can deduct 25% of your HOA fees. In case of an IRS audit, your estimation should be as accurate as possible.
The IRS allows for deductions even if you carry out business in a different location sometimes. The most important thing is that you regularly meet physically with your clients in your house and that the use of your home is pivotal in the running of your business. You can either qualify for exclusive use, regular, and trade or business use.
Thus, professionals like attorneys and doctors who have a home office would benefit from this.
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 a home office, deductions would be made based on the estimation of the portion of the house that you use for business purposes.
Other Home-Business Related Deductibles
If you use a portion of your home as an office the IRS allows for deductions on the following:
- Repairs
- Telephone and Internet
- Utility
- Rent
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 focus on the telephone and internet expenses of your business. Expenses on utility and services like electricity, gas, and trash removal can also 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 renting the house, then you can deduct the percentage of your house rent that covers the estimated cost of the space your home office covers.
Can You Deduct HOA Fees if the 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 will 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.
However, if you are not responsible for paying the HOA fees, for instance, if your tenant makes the payment then you cannot make deductions on the HOA fee.
Reasons for Allowance
The primary function of an 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 benefit from the amenities the HOA fees provide.
For rental properties, the IRS sees HOA levies as necessary expenses for maintaining the 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 on fees for the replacement or repair of amenities or 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 rent out the property.
Other tax deductible rental expenses include:
- Depreciation
- Mortgage interest
- Operating expenses
- Property tax
- Repairs
Community Improvement or Additions May Be Exempt
Although you can deduct HOA fees for rental properties, the IRS does not allow for the deduction of special assessments. Therefore, if there are additional charges to the HOA fees targeted at 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 home. Depreciation allows you to recover the cost of a property over a period of years.
Not an 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. Thus you might be the person paying but ultimately, it’s still the renter’s money.
Part-Time Rentals
If you have a vacation home or a house that you use occasionally and rent out the rest of the time, then 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 or 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 for the rest of the year, then you can only deduct the HOA fees for January to September.
Thus, if you pay your HOA fees annually, live in the property for 3 months, and use it as a rental for the remaining 9 months, you can deduct 75% of the fees from your tax.