When you’re buying a home, there are a lot of factors to consider. Along with your down payment, the location of the property, and the interior amenities, you may also need to weigh the pros and cons of an HOA. Many planned communities, condominiums, and subdivisions are managed by homeowners associations (HOAs). These organizations make and enforce rules that homeowners within the community must adhere to.
If you buy a home that’s part of an HOA, you’ll need to pay monthly fees, which usually cover the cost of repairs, maintenance, utilities, and certain amenities. Property values in HOA communities are often elevated because of how they are managed. When it comes time to file your next tax return, you may be wondering “Are HOA fees tax deductible?”.
There’s a common misconception among homeowners that these costs are deductible. In most cases, they aren’t. There are, however, exceptions that may allow you to deduct these fees from your tax return. Let’s explore HOA fees, why you need to pay them, and how they can be deducted.
What are HOA Fees?
HOA fees are dues that you must pay to the association that manages the community you live in. An HOA is controlled by a board of directors that enforces the organization’s bylaws. The board of directors usually consists of members of the community. When you pay HOA fees, the money goes towards maintenance for all properties, common areas, and shared amenities. For example, your fees should cover all landscaping.
Before you buy a home in an HOA community, keep in mind that the services that the association covers can vary based on the needs of the community. Every HOA community is different. You don’t need to be a homeowner to request the HOA’s Covenants, Conditions and Restrictions (CC&Rs), which you should do before you make an offer on one of these properties. Make sure the HOA you’re about to join isn’t too restrictive. Look for communities that offer the types of amenities you’re interested in, such as a fitness center or swimming pool.
Clarifying Tax Deductions for Homeowners
As a homeowner, there are numerous tax deductions that you can claim on your return, which include everything from mortgage interest to property taxes. The IRS maintains comprehensive guidelines on which tax breaks homeowners have access to.
For example, you can deduct the interest you pay on the mortgage loan for your home. This deduction allows you to reduce your taxable income. Like most tax breaks in this guide, you can only claim it if you choose to itemize your deductions.
Before the Tax Cuts and Jobs Act was passed in 2017, homeowners could deduct as much as $1 million in mortgage interest. The limit is now $750,000 for single filers and married couples who are filing jointly. Some of the other tax deductions at your disposal include:
- Home office expenses
- Property taxes
- Capital gains
- Deduction points
- Mortgage insurance
The IRS usually doesn’t categorize HOA fees like they do property taxes and home office expenses, which means that the deductibility of these payments isn’t great.
Are HOA Fees Generally Tax Deductible?
The general rule is that HOA fees are not deductible as personal expenses. However, there are exceptions and special circumstances where HOA fees might be partially deductible. To understand why these costs aren’t deductible, you should know what they pay for.
Some of the fees you pay go towards ongoing expenses, which include everything from utility payments and snow plowing to building maintenance and weekly trash removal. The remainder of your fees are placed in a reserve account that the association can tap into when they need to pay for emergency expenses or repairs. For example, the costs associated with replacing a damaged roof in the community gym will be covered by the reserve account.
The HOA can also charge special assessments if it doesn’t have enough money to pay for an unexpected cost. Let’s say a natural disaster comes through and wipes out certain structures. The HOA may need to collect an emergency assessment from every homeowner to cover some or all of the costs. Funds can also be raised via a capital improvement assessment, which allows the HOA to start projects that will increase the value of the community and the homes within.
These expenses aren’t tax-deductible because they’re part of being a homeowner. Someone who owns a home outside an HOA won’t be able to deduct the costs associated with property repairs, maintenance, or utility bills. There are, however, some exceptions that might apply to your situation.
Circumstances Where HOA Fees Might Be Deductible
Even though HOA fees are often placed within your monthly mortgage payments, you could write off the costs if you own an investment property or run a business. These fees can’t be deducted when they are considered personal expenses. They may be deductible if they’re business expenses.
If you work from home and are self-employed, your fees could be a business expense. The total amount you’re able to deduct depends on how much of the home you use for business purposes. Let’s say that your office is around 20% of your home. In this scenario, you could deduct 20% of your HOA fees. To take advantage of this deduction, the room needs to be used exclusively for work-related purposes.
If you own an investment property that you’re renting out, you may be able to deduct your HOA fees as a rental expense. When the property is rented out for an entire year, all HOA fees can be deducted. If you rent it out for six months, you can only deduct half of the fees you pay.
Tax Reform and Its Impact on HOA Fee Deductions
In recent years, there haven’t been any tax reforms or bills that have altered the scope and deductibility of HOA fees. However, tax laws change regularly. For example, the Tax Cuts and Jobs Act that was passed in 2017 made substantial changes to the tax code for the next decade. It’s highly recommended that you consult with a tax professional for up-to-date guidance about HOA fee deductions.
Strategies for Maximizing Tax Benefits
If you don’t qualify for HOA fee deductions, you still have numerous strategies at your disposal that can help you maximize your tax benefits. Along with the mortgage interest deduction mentioned previously, you can also deduct the interest you pay on a home equity loan. This is a type of second mortgage that you can gain access to once you’ve built up enough equity in your home. These funds can be used to pay for practically anything.
You can also deduct the interest that you’ve paid on a home equity loan or home equity line of credit (HELOC). Based on the latest tax laws, you can only deduct interest if you use the borrowed funds to pay for improvements to your home.
You can reduce your taxable income by deducting your property taxes. If you’re filing as a single individual, you can deduct up to $5,000 in property taxes. A married couple filing jointly can deduct up to $10,000. If you’re thinking of completing home improvements that make your property more accessible, these costs could be deducted.
If you’re searching for ways to offset your housing costs, consider mortgage points. These are fees that you pay upfront to reduce your interest rate. A single mortgage point costs around 1% of what you borrow. It will lower your interest rate by 0.25%, which can save you a lot of money in the long run.
When you’re using an area of your home as an office, you could deduct some of the costs associated with maintaining the space. If you don’t make a down payment of 20% or higher, you’ll likely be required to obtain private mortgage insurance (PMI), which provides the lender with additional protection. Your insurance payments can be deducted on your return.
As for capital gains, they occur when you sell your property and obtain a profit. If, for example, you buy a home for $150,000 and sell it several years later for $250,000, your capital gains will amount to $100,000. If you’ve lived in the home for at least two out of the previous five years, you should be able to keep as much as $250,000 in capital gains without paying taxes on them. Married couples filing jointly can avoid paying capital gains taxes on up to $500,000 in profit.
Conclusion:
HOA fees don’t have a high tax deductibility. However, that doesn’t mean that you can’t deduct them from your taxes. If you use a room in your home as an office, a portion of your HOA dues can be deducted. The same is true if you rent the property out to someone else. If you don’t qualify for this type of deduction, consider other tax breaks like mortgage points or interest deductions.
Before filing your next return, consult with a tax advisor for personalized advice about how to approach this situation. Under current laws, it’s possible to manage your housing expenses effectively by taking advantage of the tax breaks, credits, and deductions available to you.