You pay property taxes and homeowners association fees. The first is tax deductible up to a certain limit, but how about the latter?
Homeowners Association Fees and Your Taxes
Whether homeowners association fees are tax deductible depends on whether it’s a home in which you live or an investment property. If it is the former, you cannot deduct these fees. If it is the latter, the HOA fees are tax deductible.
HOA fees are not tax deductible for a primary residence because they are not imposed by a state or local government.
Why Aren’t HOA Fees Tax Deductible?
The IRS states that HOA assessments are nondeductible because the HOA, rather than a state or local government, imposes them. It does not matter that many of the fees go toward maintaining common areas and not your actual home. There is an exception if you use your home for business purposes. If that’s the case, you can deduct the portion of the HOA fees as a percentage of the property you are using for the business if you itemize. If you rent out the home, the IRS considers HOA fees as part of the cost of property maintenance, and the HOA fees are tax deductible. On your income tax form, fill out Schedule E for HOA fee deductions. If you rent out the home for only part of the year, the HOA fees are tax deductible only for those months.
Which Home Expenses Are Tax Deductible for 2018?
While HOA fees aren’t tax deductible for your primary residence, there are other expenses that are deductible. Under the new tax law for 2018, you can deduct up to $10,000 in state and property taxes. You can also deduct mortgage interest up to $750,000 if it is a new loan. The previous limit was $1 million, and that amount still holds true for those who took out a mortgage loan before December 17, 2017, as long as the closing took place prior to April 1, 2018.
There are also changes to the deductibility of home equity loans. Previously, you could deduct the interest on home equity loans used for any purpose, such as paying for college expenses or purchasing a new car. Under the Tax Cut and Jobs Act, you can only deduct interest on home equity loans if they are used to “build, buy or substantially improve a home” up to the $750,000 limit for combined mortgages, since a home equity loan is a second mortgage. Any deductions require itemizing, which fewer homeowners will do since the standard deduction has been increased to $24,000 for married couples filing jointly.
Which Home Expenses Are Tax Deductible for 2017?
The Tax Cut and Jobs Act was signed into law by President Trump on December 22, 2017, so prior tax law applies for 2017. If your state and local taxes were greater than $10,000, you can still deduct them. The IRS permits prepayment and deductibility of property taxes for 2018 if they were assessed in 2017. You can’t prepay 2018 property taxes and deduct them if they were not assessed until 2018. You cannot prepay “guesstimated” 2018 property taxes in 2017. For 2017, you can still deduct interest on home equity loans used for any purpose, not just building, buying or substantially improving a home. You can also deduct mortgage interest on up to a $1 million loan and up to $1.1 million if that additional $100,000 includes a home equity loan. All deductions require itemizing.
- IRS: Publication 530 (2017), Tax Information for Homeowners
- Cedar Management Group: Are HOA Fees Tax Deductible?
- IRS: Schedule E
- IRS: IRS Advisory: Prepaid Real Property Taxes May Be Deductible in 2017 if Assessed and Paid in 2017
- IRS: Interest on Home Equity Loans Often Still Deductible Under New Law
- MarketWatch: What the New Tax Law Will Do to Your Mortgage Interest Deduction
A graduate of New York University, Jane Meggitt's work has appeared in dozens of publications, including PocketSense, Zack's, Financial Advisor, nj.com, LegalZoom and The Nest.