California, like most states, has passed legislation defining how HOAs manage their affairs. Here, it’s called the...
What HOA Costs Are Tax Deductible?
This article is provided for general informational purposes only, and is not legal advice.
If you have purchased a home or condo, you are likely paying a monthly fee to your Home Owners’ Association. Typically, these HOA fees are used to cover repairs and maintenance on the outside of your home or in common areas, or for emergency repairs that may come up throughout the year. This work done by the HOA can help maintain or increase the neighborhood’s property values. While many homeowners wish they could lower their taxable income with HOA fees, there are actually only a few scenarios where HOA fees can be deducted from your taxes. Here are a few different situations to consider.
Private or personal year-round home
If you are using your property as a private home — and you utilize it year-round as your main residence — then homeowner fees cannot be deducted from your taxes. However, under certain circumstances, if the association has a special assessment for major remodel expenses then these fees may be added to your cost basis when you sell your unit.
Most homeowners fit in this category. Although the fee itself is not tax-deductible in this scenario, many other expenses relating to your home are (including your mortgage interest and real estate taxes). It’s important to talk to a tax professional to determine which expenses you’re able to deduct.
Using your home for a business
If you are using your home or condo for a business, the rules regarding taxes are slightly different. While you cannot deduct the entire amount of the HOA fee from your taxes, it’s possible to deduct a portion of it – any percentage used in conjunction with the business may be tax-deductible.
This rule also applies if you only have a small office in your home: if you use 10% of your home as an office, the same percentage of HOA fees is deductible. The same goes for mortgage interest, property taxes, and even utilities.
Using your home as a rental property
Some owners choose to use their home or condo as a rental property to house tenants. Because the IRS views the expense of an HOA fee to be a necessary cost of maintaining the property, any property used as a rental property is eligible for a tax deduction on the HOA fees. In other words, HOA fees are deductible as a rental expense.
You don’t need to rent out your entire home for HOA fees to become deductible: if you only rent out a portion of your home — such as a garage or the basement — you can deduct a percentage of the HOA fees relative to the rest of the house.
There is an exception to the rule on rental properties: special assessments for improvements are not tax-deductible. Special assessments are typically charged by the HOA to cover unforeseen situations or emergencies (this could be the result of a disaster or some other cause that is not covered by insurance or an HOA’s reserve fund). If the special assessment is used for repairs or maintenance, it is normally tax-deductible; but if it’s used for improvements, it’s almost always non-deductible. This is where it becomes very important to retain accurate records of expenses related to the rental property. By doing this, you ensure you are able to definitively allocate and claim appropriate costs.
Using your home as a part-time home or vacation property
If you use your home as a vacation home or a part-time home, you may not occupy the home for the entire year and instead choose to rent it out during those unused months. This type of setup is a unique case when it comes to HOA tax deductibles.
For this scenario, the IRS will only consider the months during which your property is in use as a rental property as being eligible for a tax deduction of the HOA fees. For instance, if the home is rented out for six months out of every year, the fees paid during that time are considered tax-deductible – but the fees paid while you are living in the home are not eligible for a tax deduction
As a general rule, most HOA fees are not tax-deductible; however, there are special cases, such as when the home is rented out or used only part-time. HOA accounting can be complex and confusing; if you’re looking for an experienced HOA management company, APS Management can help. Take a look at our HOA accounting and bookkeeping services, or contact us for a consultation.