Claiming tax deductions on homeowners association fees allows property investors to reduce the amount they pay on taxes. But you may wonder if all HOA fees are tax deductible on your primary residence or second home, or if you own an investment property.
Some HOA fees qualify as a tax deduction, but only if HOA dues relate to a business expense.
Are HOA fees tax deductible for your home? This article explains when homeowners can deduct fees paid on their investment properties, second homes, and rental properties.
What Are HOA Fees?
Homeowners associations charge fees to cover expenses relating to the maintenance and upkeep of communal areas. Therefore, homeowners of properties in an HOA community must pay regular dues to the association.
Typically, HOA fees cover the following expenses:
- Trash removal
- Landscaping
- Security in multifamily properties or gated communities
- Utility bills for communal areas
- Snow removal
- General upkeep
- Insurance policy for common areas
- Cleaning
- Building maintenance
Additionally, part of the HOA fee may go toward a fund for emergency expenses, capital improvements, and planned upgrades.
Sometimes, a special assessment may be required in case of unexpected expenses. For example, this commonly happens if the homeowners association lacks sufficient funds to complete a project. Other situations when special assessments are necessary include unforeseen emergencies, major repairs, and capital improvements.
Is It Possible to Deduct HOA Fees From Your Taxes on a Private Home?
Most homeowners cannot deduct HOA fees for their main residence on their tax returns. Even though the HOA fee adds to your monthly housing payments, the IRS views the payment as a personal expense to a private entity. Unlike property taxes, mortgage interest, and medical-related home improvements, you cannot use the homeowners fee to reduce the amount you pay in taxes.
However, a few exceptions exist when HOA fees classify as tax-deductible expenses.
When Are HOA Fees Tax-Deductible?
HOA dues are tax-deductible when you can write them off as a business expense. For example, fees associated with an investment vacation property are tax-deductible. Additionally, you may claim a portion of HOA dues if you work from home.
At what other times are HOA fees tax-deductible? Here are circumstances when lowering your tax bill by deducting HOA fees may be possible.
You run a business from home
You can deduct HOA fees if you are self-employed and work from home. The size of the deduction is based on the percentage of space your home office or store inventory occupies. For example, suppose your office takes up 20% of your home. In that case, you can deduct 20% of your HOA dues.
However, there are a few caveats when making a home office deduction. Here are a few things to keep in mind:
- Your home must be the primary place of business, where most of your administrative tasks occur.
- The space you use for a home office must be the entire room or a dedicated space. A kitchen counter or couch doesn’t count as a dedicated workspace.
- HOA costs are nondeductible if a company employs you to work remotely from home.
Therefore, when tax season comes along, be sure to include the appropriate portion of your homeowners fee in your tax return. However, it’s always a good idea to consult a tax professional when including expenses connected to running a business from home.
Tax-deductible HOA dues on a rental property
HOA fees are deductible if you use your home as a rental property. When you own an investment asset you rent out, the IRS considers all expenses—including HOA fees—as a rental expense. Therefore, you can claim 100% of HOA costs if the property is exclusively a rental unit.
HOA dues are also tax-deductible if you rent out a portion of your home. For example, suppose you rent a basement apartment or a bedroom to tenants. In that case, you can deduct a portion of the HOA costs proportionate to the rented space.
Apart from the deduction for homeowners association fees, you can also write off the following expenses on a rental property:
- The cost of home repairs
- Real estate taxes
- Mortgage interest
- Depreciation
- Advertising
- Most other operating expenses
Deduct HOA fees if you have a vacation home
Certain rules apply if you own a vacation property that you rent out occasionally. You can deduct fees in line with the percentage of time the property is used as a rental home.
For example, suppose you live in your vacation home for five or six weeks of the year. That means you can deduct 90% of the expenses because you only occupy the property for 10% of the year.
Tax-deductible condo fees
Condo fees work on the same principle as HOA fees. In this case, the condo owners association (COA) is the private entity that charges membership fees. Typically, COA fees are used like dues paid to a homeowners association. Additionally, the same rules apply for condo fees as for HOA charges.
Are HOA Dues Tax-Deductible for Special Assessments?
HOA capital improvement assessments are nondeductible for many homeowners. Capital improvements are expenses to increase the overall value of the homeowners association’s assets. They can include energy-efficient upgrades, construction of new amenities, or major renovations.
As a general rule, you cannot deduct these expenses unless the home is a rental home, or you have a home office.
Of course, capital improvements to the HOA assets will have a positive knock-on effect on your home’s value. Therefore, you may be liable for less in capital gains taxes when you sell your home.
How to Deduct HOA Fees?
The way to deduct fees paid to an HOA depends on your circumstances. Landlords list rental income, property taxes, and HOA dues in Part 1 of the Schedule E. Most homeowners who want to deduct payments to their HOA based on a home office include the amount on Form 1040, Schedule C and Form 8829.
Deducting HOA fees for landlords
The IRS views HOA fees on investment properties as maintenance costs. Therefore, you can deduct 100% of the total amount paid to the homeowners or condo association. When submitting your tax return, you include the total in Schedule E (form 1040).
If the rental property is a vacation home, you can deduct the proportion of fees when you rent the property. For example, suppose you rent it out for nine months of the year. You can write off 75% of the HOA fees in that case.
Deducting HOA fees for homeowners with a home office
Working out tax-deductible HOA dues based on home office space can be tricky. First, determine if you qualify for a home office tax deduction. If eligible, you can write off expenses equivalent to the percentage of space your home office occupies.
In addition to HOA charges, you can typically include a percentage of the following expenses on your Schedule C form:
- Interest on mortgage payments
- Utilities
- Home repairs (but not home improvements)
- Property taxes
Additionally, you must determine if you want to use the regular method or the simplified method to claim a deduction. Here’s what each means:
- Regular method: You must divide the home office expenses between business and personal use.
- Simplified method: This is calculated at a rate of $5 per square foot up to 300 square feet. It reduces the paperwork and recordkeeping for small businesses.
Are HOA Fees Tax Deductible? A Takeaway
Depending on your circumstances, you can claim HOA expenses from your taxes. If you own a rental property or have a home office, you can claim some of these expenses as deductions on your tax return.
Reducing your tax liability is one of the key advantages of investing in real estate. Investment property owners can take advantage of many tax breaks while, at the same time, enjoying passive income and property appreciation.
When considering whether to claim HOA fees on your tax return, it always pays to get personalized advice from a tax professional.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.