Can You Write off HOA Fees on Rental Property?

Owning a rental property comes with its fair share of expenses, and one cost that can catch landlords off-guard is homeowners association (HOA) fees. These regular dues can add up quickly, putting a dent in your rental profits. But did you know that you might be able to write off these fees come tax time?

In this article, we'll take a closer look at the tax implications of HOA fees for rental properties. We'll break down the specific circumstances under which you can deduct these fees, and you'll gain an understanding of when you can claim this deduction on your tax return.

We'll also explore a range of other deductions that rental property owners often miss, from routine operating expenses to more complex write-offs like depreciation and the pass-through deduction. Consider this your easy-to-understand guide to maximizing rental property tax savings.

By the time you finish reading, you'll be a pro at keeping more of your rental income and boosting profits as a real estate investor, making those 3 a.m. plumbing calls worth it.

What are HOA fees?

Homeowners associations, commonly referred to by their acronym, HOA, are common in condos, townhouses, and planned neighborhoods. The HOA is responsible for maintaining shared areas and features within the community. In some cases, they handle maintenance for individual properties as well.

To pay for all these services, the HOA charges regular fees to all homeowners. HOA fees can vary greatly depending on the amenities and services provided, which may include:

• Landscaping and groundskeeping.
• Pool and fitness center maintenance.
• Security patrols.
• Trash removal.
• Snow plowing.
• Insurance for common areas.
• Management staff salaries.

HOA fees are tax deductible in certain situations. For basic communities, they might be just a few hundred dollars per year, but fees can easily exceed $1,000 per month for luxurious communities with extensive amenities.

Are HOA fees tax deductible?

Whether you can deduct your HOA fees on your taxes depends on how you're using the property. Let's look at the most common situations:

Rental property

For rental properties you own, you can deduct HOA fees as long as you're renting out the property. Since these fees apply towards the upkeep of the property, you can apply them as a business expense and tax deduction, just like other expenses related to your rental.

Be sure to track and document all rental-related income and expenses that show you use the property for profit, including:

• Rental leases and agreements.
• Records of rent payments received.
• HOA fee statements and payment receipts.

Home business

If you operate a home-based business, you may be able to deduct a portion of your HOA fees. However, this is only allowed if you use part of your home regularly and exclusively for business purposes. The key requirements are:

• Having a dedicated space, like a home office, that is used solely for your trade or business.
• Keeping that business area strictly separate from the living areas of your home.

 As long as you meet those criteria, you can deduct a percentage of your HOA fees based on the area used for business. To calculate the deductible amount:

• Determine the percentage of your total home square footage used as the business space.
• For example, if you have a 200 sq. ft home office out of a 2,000 sq. ft residence, 10% of your home is utilized for business.
• You could then deduct 10% of your annual HOA fees as a business expense.

Vacation home

When you own a vacation home that is used for both personal purposes and renting out to tenants, the rules around deducting HOA fees become more complex. You cannot simply deduct 100% of the fees just because you rent it out some portion of the year.

The IRS only allows you to deduct the HOA fees for the periods when the home was rented out and operated as a business for generating rental income. Any HOA fees paid for the periods you used the home personally for vacations or other non-rental purposes are considered personal living expenses, which are not deductible.

For example, let's say you own a beach house and rented it out for 120 days in 2023, but used it for personal vacations for 60 days:

• That means you used it for rental real estate 66.7% of the year (120 days / 180 total days).
• So if you paid $6,000 in total HOA fees for 2023, you could deduct $4,002 (66.7% of $6,000) on your tax return as a rental expense.
• The remaining $1,998 of HOA fees would be a non-deductible personal expense.

Primary residence

If the property is your main home, you cannot deduct the HOA fees from your taxes. In this case, the IRS considers these costs personal living expenses, just like your mortgage payment, property taxes, or utility bills.

What other rental property expenses are tax deductible?

Aside from HOA tax deductibles, there are other rental property tax deductions you can take, including:

Mortgage interest

You can deduct the interest you pay on loans used to buy, build, or improve your property. This includes the interest on your mortgage and other types of loans, such as home equity lines of credit.

Property taxes

Property taxes are tax-deductible expenses you can apply against your rental income. This helps offset the costs of owning an investment property. The deductible amount is determined by the property’s assessed value and local tax rates, often leading to significant savings, especially for higher-valued properties.

Depreciation

Depreciation allows property owners to deduct a portion of the property's cost each year, accounting for the decline in the building’s value due to aging and use. This deduction applies only to the building, not the land, and is calculated based on IRS guidelines over the property’s estimated useful life. By allocating the cost over several years, depreciation offers consistent tax benefits and improves cash flow.

Pass-through deduction

The pass-through deduction, also known as the Qualified Business Income (QBI) deduction, allows owners of pass-through entities to deduct up to 20% of their qualified business income on their personal tax returns.

For real estate investors, this deduction reduces taxable income from rental activities and lowers tax liability. When you submit your real estate taxes, you do not need to itemize to take the deduction. Instead, you deduct it from the net income reported on the tax return after deducting other expenses.

Operating costs

Besides HOA fees, you can deduct other operational rental expense types associated with your property. Common expenses include:

• Utilities: Costs for electricity, gas, water, sewer, and trash removal.
• Repairs: Expenses for general maintenance and repairs that do not add value to the property but merely keep it in good working condition.
• Maintenance: This includes costs such as landscaping, pest control, and HVAC servicing.
• Insurance: Premiums for property insurance, liability insurance, and other necessary coverage.
• Property management fees: Fees paid to property managers for renting out and managing the day-to-day operations of the property.
• Advertising: Costs associated with marketing the property to potential tenants.
• Legal and professional fees: Expenses for attorneys, accountants, and other professionals.
• Supplies: The cost of goods used in maintaining the rental property, such as cleaning supplies and minor tools.
• Travel expenses: Costs directly related to the rental activity, such as visiting the property to manage or repair it.
• Office expenses: Costs for office supplies and equipment used in managing the rental property.

Deducting HOA fees

Here’s a detailed guide on how to properly deduct these fees on your tax return:

• Reporting: Report HOA fees on Schedule E (Form 1040), where rental income and expenses are declared. You should list the monthly fee as part of the property’s operating expenses.
• Deduct annual fees: You can deduct the actual amount of HOA fees paid during the tax year. If you pay an HOA fee in advance, you can only deduct the portion that applies to the current tax year.
• Record keeping: Keep records of all HOA payments throughout the year, including both special and regular monthly or annual fees.
• Prorate fees: If the property is rented for only part of the year or is a multi-use property, you will need to prorate the HOA fees.
• Special assessments: Special assessments charged by the HOA for capital improvements are not generally deductible. However, if the assessment is for repairs or maintenance that benefit the rental property, those costs may be deductible.
• Non-deductible fees: Fees or charges that increase the value of the property, such as improvements or enhancements, are not deductible as expenses. Instead, add them to the cost basis of the property, as they can be used to reduce capital gains when you sell the property.

Is HOA tax deductible for rental property owners?

Yes — if you own a rental property that's part of a homeowners association, you can write off the HOA fees on your taxes. These monthly or yearly dues can be claimed as a legitimate business expense for your rental property, helping you offset some of the many costs of being a landlord.

Tax season doesn't have to be a dreaded headache. With this guide, you have the knowledge to claim deductions that you qualify for as a rental property investor. From operating expenses to complex write-offs like depreciation, you now understand how to keep more profits while following IRS rules. Of course, it's always wise to consult a tax professional who can provide personalized guidance tailored to your specific situation.

Keep detailed records, take advantage of all the deductions available to you, and watch your rental income grow. After all, your tax savings could be the difference between just getting by or truly getting ahead financially. And isn't that why you became a landlord in the first place — to build wealth and achieve your goals? Now you're one step closer.

Are HOA fees tax deductible on a rental property? FAQs

What is not deductible on rental property?

You can't deduct the cost of improving or renovating your rental property if it increases the property's value. You also can't deduct personal expenses, like traveling to the property for your own use. The interest on a mortgage for a rental property that is not your main home is also not fully deductible.

Is rental property insurance tax-deductible?

Yes, the cost of insurance for your rental property, like property, liability, and casualty insurance, is generally tax-deductible as a business expense. You can claim these insurance premiums when you file your taxes, and this can help balance out your rental income and lower your overall tax bill.

Do HOA fees reduce capital gains?

No, the HOA fees you pay don't directly lower the capital gains tax you'll have to pay when you sell the rental property. However, you can add the HOA fees you pay over the years to the cost basis of the property. This means they can indirectly reduce the taxable capital gain, though the impact is usually small.