A homeowners association, or HOA, collects fees from its members to finance services and management of the shared property. Property tax and interest on a mortgage are tax-deductible, so it is a common assumption, or at least a common hope, that HOA fees are also tax-deductible.
Some situations allow HOA fees to be tax write-offs so that part or all of the HOA fees become tax-deductible. These specific cases involve business rather than personal use of the property. In this article, we’ll investigate these exceptions and why HOA fees are typically non-deductible.
In general, HOA fees are not tax deductible in California. The IRS views them as personal expenses, not a tax, rendering them ineligible as tax deductible. But there are exceptions. For properties used as rentals, businesses, or which include a home office, the fees (full or partial) are deductible.
California HOA Fees Are Generally Non-Deductible
HOA fees can cover a range of services that keep property values high; from maintenance and repair to landscaping and enrichment of common areas.
Your HOA is a private entity managing the interests of its members. These services wouldn’t be deductible if performed by the homeowner in a non-HOA area, and therefore aren’t deductible when you’re paying someone else to do them.
Unless part of the HOA fee includes tax-deductible expenses, like mortgage interest, then the fee is treated as a personal homeowner expense by the law. It’s worth asking your HOA what the fee pays for because you’ll be able to write off any property tax or mortgage interest expenses if these are included.
Exceptions to the Rule
You Rent Your Property Out
When you’re renting out a property, HOA fees no longer qualify as personal homeowner costs. The IRS will instead view these as a business cost; an expense necessary to operate your rental.
Because the services of the HOA fees (maintenance, repairs, landscaping, and others) are now rental expenses, they qualify as a business deduction and can be written off. The full amount is tax-deductible on your Schedule E form 1040.
If only part of the home is rented out or you only rent it for part of the year, then only part of the HOA fees will be deductible. In this case, you’ll need to calculate the percentage of the property rented or the percentage of the year it’s rented and only write off that percentage.
All this said, it is rare for an HOA to even allow you to rent out your property.
You Run a Business From Your Home
If you are self-employed and you run a business from your home, a portion of your HOA fees can be tax-deductible. Your home must be your business’s primary location, as in you store products, serve customers, and/or complete administrative tasks at home.
Similar to renting, this exception exists because, in this scenario, part of the HOA fees are being applied to business expenses rather than personal expenses.
To calculate how much of the fees are deductible, you should define how much of your house is being used for your business.
Normally, you’ll be looking for a percentage, which you can calculate by dividing the square footage of your workspace (measured with a tape measure) by the total square footage of your home.
You Have a Home Office Space
Similar to running a business from home, if you have a dedicated home office you can write off a percentage of the HOA fees. However, since the Tax Cuts and Jobs Act of 2018, you have to be self-employed to get this benefit.
In addition to measuring your home office, take photos of your home workspace in the event that the IRS asks for proof of your home office. During an audit, they’ll want evidence of a dedicated workspace, not just your kitchen table where you work on your laptop for example.
As an example calculation: if you measure your home office and find the room to be 10×15 ft, and you live in a 1,200 ft2 house, then 15% ((150/1,200) * 100) of your HOA fee is tax-deductible.
What About Special Assessments?
Special assessments are additional fees that an HOA can charge for maintenance, repairs, or improvements. They can also address unexpected costs of an individual unit or address community-wide needs, such as property damage from natural disasters or improper budgeting.
Homeowners legally have to pay for special assessments as there is always a clause addressing them in an HOA contract. This is why reading your HOA contract and the CC&Rs is so important; by signing the contract, you give them a certain level of power over you. However, it is possible that insurance can cover special assessments, so always check with your provider before paying out of pocket.
Special assessments for maintenance and/or repairs can usually be written off (but only for rental properties). However, special assessments for improvements aren’t tax-deductible, even if you’re renting out your property. Remember, you can still deduct other expenses for rentals such as repairs, depreciation, and utilities.