With some exceptions, landlords are entitled to deduct operating expenses, including HOA fees and COA fees, from their taxable rental income.
It makes sense to find as many ways as possible to reduce your taxes through deductions. But what about if you’re a member of a homeowners association? Are HOA fees tax deductible? The answer to this question is more complicated than a simple “yes” or “no.”
HOA fees are what you pay to retain your membership for the homeowners association (HOA) of your gated community, planned development, or neighborhood. The fees go toward maintaining amenities like the swimming pool, park, or clubhouse and services like landscaping, snow removal, trash pickup, and general upkeep of the community. Some fees may go toward a reserve fund to pay for larger expenses in the future, such as an upgrade or expansion of the community.
If you live in your property, you’ll only be able to deduct HOA fees that contribute to something that would have been tax deductible if you had paid for it directly. One example of this is the amount in HOA fees that go toward property taxes on the land you own. The deduction you can receive is equal to what you claim in deductions for property taxes for your home.
You can also receive a deduction if you’re self-employed and work from home. Your deduction will depend on the size of your home office. For instance, if your workspace is 20 percent of the property, you can deduct 20 percent of expenses like utility bills, home repairs, and mortgage interest. It doesn’t matter what the HOA actually uses the money for — you can still deduct this amount from your HOA fees.
Note that there are some restrictions to the home office deduction. It does not apply if you are employed by a company and work remotely. Furthermore, if you’re self-employed, your home office must be your primary place of business or where you store inventory. If you meet clients or handle the majority of administrative tasks at another location, your home is not your primary place of business. In addition, you must have a dedicated space in your home solely for work — either an entire room or a desk in the corner of a room, but not the couch or dining room table. This is important because you may need to provide photographic evidence showing your home office if the IRS decides to audit you.
Although they have a different name, condo fees are much the same as HOA fees. Instead of belonging to a homeowners association, you’re part of a condo owners association (COA) and need to pay dues for your membership. The fees go to much the same places, including toward the maintenance of common areas that you co-own with other residents. Since COA fees are almost identical to HOA fees, the same rules apply as above.
The situation is completely different if you’re an owner of a rental property that you don’t use as your primary residence. When you have an investment property, you are entitled to deduct all your operating expenses — which includes HOA fees and COA fees. This is one of the key advantages of investing in rental properties as it allows you to minimize your end of year tax bill and increase profitability. The exception is when HOA fees are for a special assessment for improvements. The good news, though, is whereas these may not be tax-deductible, you can still regain your investment through depreciation.
If you never occupy any part of your rental property yourself, all of your HOA fees are tax-deductible. However, if you live in the property yourself for some of the year (such as in the case of a vacation property), you can only deduct fees according to the percentage of time the house is a rental property. For example, if you occupy the home for 10 percent of the year, you can deduct 90 percent of your HOA fees.
You can also deduct some of your HOA fees from your taxes if you rent just part of your property, such as a bedroom or basement apartment. The same formula applies to a home office: you need to calculate the percentage of the home you dedicate for this purpose. As an example, if you’re renting your basement and the basement makes up 25 percent of the total property, 25 percent of your HOA fees are tax-deductible.
In any of these cases, make sure to include your HOA fees (or COA fees) on your Schedule E form, where you report supplemental income and loss.
For investment property owners, the only downside to increasing tax deductions is that you have more accounting work to do. The solution is to use an accounting tool specially designed for people renting investment properties. Landlord Studio allows you to do all your rental accounting in one place, including taxes, income, and expense tracking.
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