HOA fees can be a bit steep, and while in many communities, they are necessary for the proper maintenance of the space for all neighbors and residents, they are still an expense.
So for those who keep up with their taxes and know how costly they can be, questioning whether HOA fees are tax-deductible is a pretty important premise.
Can HOA fees be tax-deductible?
Answering this question, in a nutshell, is quite complicated because, under some conditions, HOA fees are not tax-deductible at all. But, in other instances, they are.
The first answer to this question in several places is no, but this is a vague answer with little substance. Although under the most common case, HOA fees are not tax-deductible, in many others, they are.
When are they not tax-deductible?
Primarily, HOA fees are not tax-deductible when you, as the homeowner, reside in it 100% of the time. You cannot claim a deduction for the HOA fee when it is your primary residence.
So, that is usually the main answer when people ask if their property’s HOA fees are tax-deductible because most residents in their homes are normal.
To this should be added that you can’t deduct HOA fees when your primary residence meets the following: you don’t use it for profit, nor do you have anyone else renting in it. We’ll see why later.
When you spend a lot of time working away from home and only go to your property to eat or sleep, you also don’t qualify for a tax deduction for this fee.
Because, even if you spend little time there, you still enjoy the benefits of an HOA.
The fact that the fees are not tax-deductible has its reasons. And that is, to the IRS, this is a personal expense for space beautification, and as it has always been, the IRS does not recognize personal expenses as deductible.
When are HOA fees tax-deductible?
For most people, HOA fees are not tax-deductible. However, there are several situations where HOAs are tax-deductible.
In the case of rental property
Unlike when your property is your primary residence, the IRS considers the HOA a rental expense when one or more renters live on your property.
Therefore, by renting out your property, you can deduct the HOA dues from your taxes. You must fully rent the property to deduct 100% and not have it as a personal residence at any time.
However, it does not mean you cannot access deductions for HOA dues when your property is not 100% rented. Having it rented for the entire time is unnecessary for deducting HOA dues.
You still live in it
When the property is rented, but you continue to live in it, you can deduct a portion of the HOA fee based on the rental price. This formula is directly proportional.
The more rented space you own, the greater the percentage you can deduct from HOA fees. In addition, the percentage is equal to the amount of space you have rented relative to the total space in your home.
To make it more practical, here’s an example. If you only rent the basement and the basement is 15% of the total size of your home, you can deduct only 15% of your HOA fees. The same applies to any other part of the house.
You still reside in it from time to time
Also, it’s not just about the space rented but the time. When your home is rented full-time monthly, you can deduct 100% of the HOA fees for that tax year.
But, when you rent your property part-time, you can only deduct the HOA fees for the time during the entire year when your home is rented. A directly proportional relationship also applies to this case.
For example, if you rent your home for six months of the year, whether they are continuous, these six months represent 50% of the entire year. This 50% of the whole year your home is rented is the same 50% percent you can deduct from your HOA fees.
Working out of your home
When your home is considered your place of business, you can also deduct your HOA fees from your taxes. Unlike in the case of renting, you can virtually never deduct 100%.
First, you must be self-employed and registered to qualify for a tax deduction for HOA fees due to working out of your home.
If you work for someone else, having an employer or direct hire as a common worker for a company, you cannot use deductions of this type. You can only do so if you are self-employed with no employer.
You must also have one or more spaces in your home dedicated exclusively to your work, whether they are large or small spaces. Furthermore, you do not apply for the deduction when you use your work tools in any space in the house without having one dedicated to that work.
For example, if you are a makeup artist and don’t have a salon in your home and your service anywhere in your home and have your work tools without an established location, you cannot use the HOA tax deduction.
If you meet both requirements, the deduction will only be applied to the percentage of the space in your home used for your work. Similar to what is mentioned in the rental section.
For years I have studied American finance regulations. All the information in this blog is sourced from official or contrasted sources from reliable sites.
Salesforce Certified SALES & SERVICE Cloud Consultant in February 2020, Salesforce Certified Administrator (ADM-201), and Master degree in “Business Analytics & Big Data Strategy” with more than 13 years of experience in IT consulting.