What if HOA assessments were tax deductible?

By Deborah Goonan, Independent American Communities

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Today’s buzz in HOA politics: two Democratic Congressional Representatives are co-sponsoring a bill to provide a special federal tax deduction for owners of property in a homeowners’ association:

Source:

CAI SUPPORTS FEDERAL LEGISLATION TO PROVIDE HOMEOWNER RELIEF

https://www.caionline.org/Advocacy/GovernmentAffairsBlog/Pages/HomeAct.aspx

Excerpt:

U.S. Representatives Anna G. Eshoo (D-CA) and Mike Thompson (D-CA) have introduced a measure that would allow homeowners in community associations who earn $115,000 or less in annual income to deduct up to $5,000 of their community association fees and assessments from their federal tax liability.

(The bill number is HR 4696, if you want to read the text and check the status.)

In summary, if passed as proposed, a homeowner would be able to deduct up to $5000 in annual association assessments from federal income tax. Eligibility for this deduction would phase out for individual taxpayers earning over $115,000. ($165,000 for those filing joint returns)
Having read the bill, my understanding is that the deduction for Association assessments would be similar and in addition to deducting property tax payments from federal income tax liability. In other words, this is a deduction only allowed if the taxpayer itemizes.

Also interesting to note:

  • The bill calls for the HOA tax deduction only for a primary residence.
  • However, it would not apply to special assessments.
  • The HOA would have to file annually with the IRS, a report of ‘qualified assessments’ paid by each homeowner.

The reasoning behind the bill is to offset double taxation – because your HOA provides several of the services also provided by your local government, yet, with few exceptions, your property tax bill is not reduced to offset the value of services you are paying for with HOA assessments.

As Dawn Bauman, CAI puts it:

This bill recognizes the financial unfairness facing homeowners in community association, as they pay their fair share of local property taxes, along with their community assessments, and receive many municipal services from their community association; like street and sidewalk cleaning, trash removal, snow removal and more.

 

Sounds good, but…

The problem with this bill – besides its likely impact on federal tax revenue – is that it has great potential to be viewed by taxpayers and Congress alike as very unfair.

Let’s take a look at the bill’s proposed definition of qualified assessments:

`(c) Qualified Homeowners Association Assessments- For purposes of this section–
`(1) IN GENERAL- The term `qualified homeowners association assessments’ means regularly occurring, mandatory financial assessments (other than a special assessment)–
`(A) paid by a taxpayer to a homeowners association with respect to the taxpayer’s principal residence (within the meaning of section 121),
`(B) that directly benefit the taxpayer’s principal residence, and
`(C) the obligation of which to pay arises from the taxpayer’s mandatory and automatic membership in such homeowners association.

Think about your assessment payments. How much of the total amount is used to pay utility bills (electric, water, sewer, cable, etc.)? Why should the owner of a condo be able to deduct the cost of utility bills, when other taxpayers cannot?

What about maintenance of private recreational lakes, parks or restricted access walking trails? Or how about the exercise room, spa, and movie viewing room in your condominium? Should that portion of assessments be tax deductible?

If so, then why can’t the owner of a non-HOA home deduct the cost of maintaining a private gym membership, or a home theater, or a backyard pool?

To be fair, if Congress were to authorize a tax deduction for HOA assessments, shouldn’t the HOAs have to quantify essential expenses vs. nonessential expenses? Essential expenses for things like road and storm water maintenance, traffic signs, snow plowing, trash removal, dam maintenance might reasonably be considered equivalent to public services that non-HOA owners pay for on their property tax bills.

But what about gated communities with private, limited access roads? Or a private parking garage?  Although these community assets would both require essential maintenance, would their limited public access justify a tax deduction?

I think it will be a hard sell in Congress, especially in a political environment where the subject of income inequality is a hot-button issue in a Presidential election year.

 

Congress may have little appetite for additional tax reductions 

In addition, in recent years there has been increasing push to do away with the property tax deductions altogether.  Many in Congress want to simplify the tax code with lower, flatter, more fair tax rates, and, at the same time, eliminating nearly all itemized deductions and tax loopholes.

Other proponents of doing away with homeowner carve-out deductions say the tax code needs to be more fair for  taxpayers that do not own a home. Adding an additional tax deduction for HOA assessments would only strengthen their argument.

The National Association of Realtors and National Association of Home Builders favor keeping existing tax deductions for property taxes, for obvious reasons. They believe it will help sell more homes and support higher sale prices.

Perhaps CAI favors the HOA Assessment tax deduction because it might help take the sting out of their ever-increasing HOA management fees?

Other questions that come to mind:

Since CAI now concedes that HOAs provide and array of municipal services, will Congressional leaders approve the tax deduction under the condition that HOAs operate under the constraints of the 14th Amendment of the US Constitution?

After all, if Congress can be convinced that HOAs are more or less mini-governments equivalent to municipalities – their assessments akin taxes and eligible for deduction – then shouldn’t HOAs be charted and governed in a manner consistent with municipalities as follows?

  • Prohibiting taxation without representation, and mandating One Person, One Vote for election of Board members
  • Eliminating Developer control of HOAs, in favor of Democratic control, even in the early stages of development
  • Requiring rigorous due process before issuing fines, placing liens, or initiating foreclosure

 

Reader comments welcome.

 

Reference:

US Code 528, Definition of Homeowners Association

https://www.law.cornell.edu/uscode/text/26/528

 

Additional Reading:

COMMON INTEREST DEVELOPMENTS CID HOMEOWNERS’ FEES AND THE ISSUE OF DOUBLE TAXATION (PLRI, Barbie L. Anderson)

http://gov.uchastings.edu/public-law/docs/plri/CIDHome.pdf

 

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2 Replies to “What if HOA assessments were tax deductible?”

  1. A distraction. I believe the proposal disingenuously addresses one symptom of HOAs’ unfairness. If property tax disparity was the real issue, it makes better sense for county assessors to tax properties in HOAs that provide streets, lighting, sanitation, flood prevention, etc. at a lower base rate. The fundamental issue is that municipalities—not HOAs—should provide said services. Volunteer homeowners are not qualified to perform the duties of civil servants. That is part of the reason HOA reserves are often not properly funded.

    Liked by 1 person

  2. My impression when looking for a primary residence was that HOA fees would factor into a property’s overall listing price (reducing it) because the buyer would have to factor HOA costs to their monthly payment and affordability. For example you could afford a house with $3k mortgage and no HOA or a house/condo with a $2500 mortgage and a $500 HOA, the latter property obviously having a lower list price. If this is the case, and assuming property taxes are based on the assessed value of the home, HOA property owners would already be paying less property tax for what might be considered an equivalent property by some buyers.

    Like

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