Did you know you may be able to save money on taxes every year by properly deducting homeowners association (HOA) fees for your rental property? These tax savings could really add up over the years, and be put towards improving the property, financing a new investment, or simply lining your pockets!
Deductions are about more than just reducing taxes. They’re an integral part of sound financial management of your real estate assets.
This article is a guide to identifying which HOA fees are generally deductible, and aims to help you maximize potential savings on your rental property tax returns.
What do HOA fees typically include?
HOA fees are regular payments property owners make within a community that contribute to the overall maintenance and enhancement of shared spaces and services. Think of them as a collective expense, helping to keep the neighborhood a desirable place to live.
What these fees cover can vary widely from one HOA to another. Typically, they include landscaping, upkeep of communal facilities like pools and clubhouses, and utilities like water and trash disposal.
Beyond the basics, HOA fees may also go towards security measures like gated entry systems and neighborhood patrols or contributions to reserves and special assessments. In some communities, these fees cover street and sidewalk maintenance and even pest control services.
Can you deduct HOA fees on your rental property?
Yes, HOA fees can indeed lighten the tax load if your property is a rental.
The IRS views these fees as deductible rental expenses, so property owners can apply them when filing taxes. The deduction applies fully if your property is used solely for rental purposes, allowing you to claim 100% of your HOA fees, not including special assessments (see below).
You can also sometimes claim this tax benefit for properties you don’t use exclusively as rentals. For instance, if you rent out part of your home, such as a basement suite or a room, you can sometimes deduct HOA fees proportional to the rented space.
Similarly, if you have a vacation property that you live in for part of the year and rent out for the remainder, you’re typically entitled to deduct the portion of the HOA fees that correspond to the rental period.
How to report and deduct HOA fees for rental property
For efficient documentation and recordkeeping, we recommend starting by organizing all the receipts and statements that pertain to your HOA fees.
Create a detailed digital or physical file that includes all payment confirmations, bank statements showing the transactions, and any correspondence from the HOA regarding fee schedules or changes.
To report HOA expenses, most investors will use Schedule E (Form 1040). This form is specifically designed for reporting rental real estate income and expenses.
On line 19 of Schedule E, list your HOA fees for the year plus any other miscellaneous expenses related to the rental property not listed elsewhere on the form. It’s important to clearly itemize these expenditures so the IRS recognizes them as legitimate rental property expenses.
This organized approach supports your deduction claims and strengthens your position in the event of an IRS inquiry. Remember, the more meticulous you are with your documentation, the easier it is to substantiate your expenses and safeguard your deductions.
Are condo fees for rental property tax deductible?
Like HOA fees, condo fees are regular payments made to a condo owners’ association (COA) for the upkeep and maintenance of shared spaces and amenities within a condominium community.
The IRS treats condo fees like HOA fees when you rent out the property, viewing them as a rental business expense you can deduct from your taxable income as long as you rent out the condo all or part of the time during the year.
What about deducting HOA special assessments?
Special assessments levied by homeowners associations are different from regular monthly or annual HOA fees.
These assessments are typically one-time charges. They often cover significant capital expenses not included in the HOA’s general budget, such as emergency repairs, major renovations to communal property, or one-time replenishment of a capital reserve account.
Unlike regular HOA fees, which are deductible as a rental property expense, the deductibility of special assessments on your tax return depends on the nature of the expense they cover.
Special assessments are generally deductible in the same year they’re paid if the funds are used for repairs and maintenance to preserve the current property value, such as fixing a roof or repainting communal areas.
However, if the special assessment funds improvements or additions that increase a property’s value, such as building a new community center, these costs are not immediately deductible. Instead, they must be capitalized and depreciated over the useful life of the improvement or addition.
How to maximize your tax benefits
To ensure you’re not inadvertently leaving money on the table by overlooking valuable tax deductions, here are some actionable tips to help you fully leverage tax benefits for your rental property:
- Optimize your rental property depreciation: Besides basic depreciation, consider segmenting your property’s components for accelerated depreciation. Items like appliances and carpets can often be depreciated over a shorter life span, offering more immediate tax relief.
- Deduct travel expenses: If you travel to your rental property for maintenance, inspections, or tenant meetings, those travel expenses can be deductible in some circumstances. That can include mileage, flights, lodging, and meals during long-distance trips specifically undertaken for rental-related activities.
- Maximize the home office deduction: You may qualify for this deduction if you manage your rental properties from home and have a dedicated space set aside that is used for no other purpose. This deduction can often include a portion of your mortgage interest, insurance, utilities, repairs, and depreciation related to the space used.
- Consider a cost segregation study: For larger investments like multifamily units, a cost segregation study can dramatically increase your upfront deductions. By identifying and reclassifying personal property assets and land improvements, the study can front-load depreciation deductions, significantly reducing taxable income in the early years of property ownership.
- Keep detailed records: Maintain receipts, contracts, and records of all transactions related to your rental property, including purchase documents, operating expenses, repairs, and improvements. This attention to detail simplifies claiming deductions and supports your tax filings in case of an audit.
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