Learning to plan ahead is a great strategy when it comes to taxes. Many Americans are looking for ways to limit what they owe via credits or deductions. Yet, with ever-evolving regulations and sometimes arcane tax laws, it can be tricky to do so.
When it comes to homeowners association fees, for example, it can be difficult to figure out which scenario may allow you to deduct these from your taxes.
We contacted experts who offered their expertise on the question, “Are HOA fees tax-deductible?”
What Are HOA Fees?
HOAs across the country are responsible for managing and maintaining the common areas and setting guidelines and rules of a planned community.
As H&R Block explains, an HOA is “a governing body that sets specific rules and guidelines that you agree to abide by when you purchase property in a condominium, gated community, apartment or other type of planned development.”
The HOA is also responsible for the collection of fees from the residents of the community. It’s typically a monthly or quarterly fee that is charged by the homeowner’s association for services it provides to a community.
These fees are used for the following:
- Maintenance and repairs
- Landscaping
- Upkeep of the community and common areas
- Insurance for common areas
- Safety and security
- Special community events
Are HOA Fees Tax Deductible? The Simple Answer
Home and condo owners may wonder if HOA fees are tax deductible. The IRS tax rules regarding this area of tax law is complicated. Most HOA fees are not tax deductible, but there can be exceptions.
“As is often the case in federal tax, the answer is — it depends,” said Karen Wallace, assistant professor in Adelphi University’s Willumstad School of Business.
She added that whether HOA fees qualify as tax-deductible depends on whether the owner’s use of the property is personal or business.
While the determination is straightforward when the property’s use is exclusively personal or business, the answer is more complicated when a property has both personal and business use characteristics. Here’s a breakdown.
When HOA Fees Might Be Tax Deductible
HOA fees are generally not deductible. An exception to this rule involves rental properties, vacation homes, home offices or investment properties.
Here are the exceptions:
Can You Deduct HOA Fees for Rental Properties?
HOA fees can be deducted as an operating expense on Schedule E when you file your taxes.
For rental properties, there are two scenarios in which you can claim an HOA deduction from your taxes. Here’s how it works:
Full Deduction
If you use the property as a rental property exclusively, you likely can deduct the full amount of your HOA fees.
As True Tamplin, a certified educator in personal finance and founder of Finance Strategists explained — if you’re renting out a property and pay HOA fees for it, you can usually write these fees off as part of your rental business expenses.
“These fees are considered necessary for the maintenance and upkeep of the property, which generates income,” he said.
Partial Deduction
If you rent your home for part of the year and live in it the rest of the time, whether you receive a deduction depends on this IRS rule. If you rent a residence that you also use for yourself, limitations may apply to the rental expenses you may deduct.
You are considered to use the property as a residence if you use it for personal purposes for more than the greater of:
- 14 days during the tax year, or
- 10% of the total days you rent it to others at a fair rental price.
Can You Deduct HOA Fees for a Home Office?
If you have a home office, you may be able to deduct a portion of your HOA fees. You can deduct party of your HOA fees if you meet the following criteria:
Use the Home Office for Business
For instance, if a part of your home is regularly and exclusively dedicated to your business, and you’re also paying HOA fees, you might be able to deduct a slice of those fees, Tamplin added. “The catch is, it has to be directly related to the business part of your home.”
How Your Home Office Qualifies
To qualify, your home office has to be the primary location of your business — usually defined as the place where all the administrative tasks take place.
In addition, if you store inventory at your house for your business, that square footage may also qualify, though the IRS has specific qualifications you must meet.
Amount You Can Deduct
The amount you can deduct is based on and proportional to how much of your home you use for your business.
For example, if your home office takes up 10% of your home, you may be able to deduct 10% of your HOA fees.
When are HOA Fees Not Tax Deductible?
On the other hand, if you’re just living in your place and not renting it out or using it for a business, the IRS isn’t going to give you a break on those HOA fees.
“And the same goes for if you have a second home or vacation spot that you’re not renting out,” Tamplin said.
Also, HOA fees for special improvements for major repairs will likely not qualify for a HOA fee deduction.
Tax Deductible Home Expenses That Are Often Confused with HOA Fees
While HOA fees may not always be deductible, there are other home expenses that can be deductible:
- Mortgage interest. You can deduct mortgage interest on your primary or secondary residence as long as you itemize your deductions.
- Home office expenses. Utilities and mortgage interest may be deducted if you qualify for a home office deduction.
- Property taxes. Property taxes are deductible as long as they don’t exceed the state and local cap.
- Energy efficient tax credit. Certain energy-efficient improvements like solar panels and insulation can qualify for tax credit.
Key Takeaways for Homeowners
These are three key things you should know if you are a homeowner and want to deduct your HOA fees when it’s time to file taxes.
Talk to a Tax Pro
Tamplin emphasized that because of the complexity and of these tax rules, it’s always beneficial to chat with a tax pro.
“They’re the experts and can help you figure out exactly what you can and can’t deduct, especially since tax rules can change,” he said, adding that keeping good records is another smart move.
Document Why Your Home Office Qualifies
“If you’re deducting expenses like HOA fees, you’ll want to have all your ducks in a row if the IRS ever wants to take a closer look,” Tamplin said. “And if you’re claiming a part of your home for business, make sure it really is just for business. The IRS has specific rules about what qualifies as a home office.”
Deduct HOA Fees Only for Times Your Property Was Rented
For anyone renting out a property, just remember to only deduct HOA fees for the times your place was actually rented out. If you’re using it yourself for part of the year, you have to adjust those deductions accordingly
Ya?’l Bizouati-Kennedy contributed to the reporting for this article.
This article originally appeared on GOBankingRates.com: Are HOA Fees Tax-Deductible? Learn When You Can
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
