Tax Strategies & Credits

Uncovering Little-Known Tax Deductions For Homeowners Associations

Homeowners associations (HOAs) play a critical role in managing and maintaining shared properties and amenities within many residential communities across the United States. HOAs shoulder financial responsibilities for the neighborhoods in which they operate, which means they also typically find themselves liable for paying state and federal taxes.

While many HOA leaders are familiar with common deductions, several lesser-known tax write-offs could significantly benefit these organizations. In this article, we'll provide details about some little-known tax deductions that homeowners associations may be able to take advantage of, ensuring accurate and well-informed tax planning.

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1. Repairs and Maintenance Expenses

HOAs can often deduct expenses related to repairs and maintenance of common areas and amenities. This includes landscaping costs for public areas like parks, swimming pool maintenance, and repairs to communal buildings, parking lots, and pathways. By carefully tracking these expenses, HOAs can potentially reduce their taxable income and allocate more funds to improving the community.

2. Professional Service Fees

Fees paid to professionals, including attorneys, accountants, and property management companies, can be eligible for tax deductions. These services are, in many cases, essential for the smooth functioning of an HOA. By accurately documenting and deducting these fees, HOAs can potentially offset some of their operational costs.

3. Bad Debt Write-Offs

HOAs occasionally encounter delinquent homeowners who fail to pay their dues or assessments. If attempts to collect these debts have been exhausted, the unpaid assessments may be deemed as bad debts and could potentially be deducted as a loss. However, it is imperative for HOA members to comply with all Internal Revenue Service (IRS) guidelines regarding bad debt deductions.

4. Capital Improvements

While repairs and maintenance expenses are often deductible, capital improvements present a unique tax advantage. Rather than being fully deductible in the year of expenditure, capital improvements are depreciated over time. In short, this means that HOAs are legally allowed to deduct a portion of the cost over several years, reducing their taxable income for each year of the depreciation period.

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5. Energy-Efficient Upgrades

HOAs that choose to invest in energy-efficient upgrades, such as solar panels, energy-efficient windows, or insulation, may qualify for tax credits and deductions. It is worth noting that this can get murky if individual homeowners within the HOA community pay for the improvements. The IRS offers incentives to promote sustainable practices, which can, in certain cases, lead to significant tax savings for HOAs while contributing to a greener lifestyle overall.

6. Disaster Recovery Costs

In the unfortunate event of a natural disaster, a homeowners association may be able to deduct certain disaster recovery costs not covered by the organization's insurance. These deductions can include expenses related to communal property restoration (e.g. a clubhouse), general neighborhood repairs, and cleanup efforts. Careful documentation is essential in case there is an IRS audit.

7. Charitable Contributions

If an HOA makes charitable contributions to qualified organizations, these donations may be tax-deductible. For instance, if the HOA contributes to a local charity or community project, they can frequently benefit from tax savings while supporting worthy causes.

8. Professional Education Expenses

Expenses related to HOA board member education and training may also be tax-deductible. These individuals often take on significant responsibilities, so investing in their education can lead to more effective governance and improved financial management within the community.

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Because the tax laws surrounding homeowners associations can be complex, it is wise for every HOA to work with a qualified tax professional or CPA. Experts who specialize in HOA taxation will be able to determine which deductions are viable and help gather the necessary documentation to submit to the IRS. This can greatly reduce stress, and ensure that your board is fully tax compliant year after year.

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Gordon W. McNamee

Gordon W. McNamee

Gordon W. McNamee is a Certified Public Accountant (CPA) based in Rancho Cucamonga, CA. Gordon W. McNamee can assist you with your tax return preparation, payroll, accounting and tax planning needs. <br /> <br /> 2021 is Gordon W. McNamee, CPAs 38th year in the profession. As as a former IRS agent (1984 through 1987), Gordon has been in public accounting since 1987. Gordon specializes in individual, corporate, HOA, trust, estate and payroll taxes. He also prepares financial statements and provides accounting & bookkeeping services. He enjoys making his clients feel at ease while providing a personalized professional service.

GORDON W. MCNAMEE, CPA
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