HOA Special Assessment (Rental) - total or paid out?

[buns2]

Hello,

I have a 10K special assessment for a rental starting in 2022.

The assessment is spread over 2 years. Would I depreciate the expense starting at 10K or split it at 5K in 2022 and another 5K in 2023?

Thank you in advance!

[DoninGA]

You do not depreciate a HOA assessment, it is entered as an expense only.

On your 2022 tax return you only report the amount that you have paid in 2022 for the assessment.  If the total assessment was not paid in 2022 then enter on the 2023 tax return the balance of the assessment you will pay in 2023.

It should be entered on Schedule E Line 19 as an Other expense.

[Mike9241]

we need to know what the SA was for. most of the time it's for repairs and maintenance that are neither betterments nor extends the useful life making the payments an expense. on the other hand, if this was say for a swimming pool, cabana, paved parking lot that never existed before then that would be a betterment which needs to be depreciated starting with the year the betterment is put into service.

[buns2]

Thanks Mike.

The SA are for railings around the complex and building a new drainage system to divert water away from the complex (will be sawcutting thru the city's sidewalk).

My understanding is that this SA is a 'land improvements' instead of a "residential rental real estate" improvement.

I am confused because you said it is depreciated but Turbotax and another source said it will be expense right away.

Turbotax is expensing the land improvement right away and I read only

"Examples of land improvements are drainage and irrigation systems, fencing, landscaping, and parking lots and walkways. A special item is the ongoing cost of landscaping. This is a period cost, not a fixed asset, and so should be charged to expense as incurred" (Source: Accounting Tools)

[Mike9241]

from a law firm article

4. Bonus depreciation is available for certain building improvements

bonus depreciation was available for two types of real property:

• Land improvements other than buildings, for example fencing and parking lots,

from the IRS

Asset class 00.3, Land Improvements, of Rev. Proc. 87-56 includes
improvements directly to or added to land, whether the improvements are
1245 or

1250 property, provided the improvements are depreciable. Examples of these
assets might include sidewalks, roads, canals, waterways, drainage facilities, sewers,
wharves and docks, bridges, fences, landscaping, shrubbery, or radio and television
transmitting towers. Assets included in asset class 00.3 have a recovery period of 15

years.

based on this the sewer qualifies for bonus depreciation

note that PUB 946 page 23 states to be qualified property for bonus depreciation

Certain Qualified Property Acquired After September 27, 2017
You can elect to take a 100% special depreciation allowance for property acquired after September 27, 2017, and placed in service before January 1, 2023. Your property is qualified property if it meets the following.
• Tangible property depreciated under MACRS with a recovery period of 20 years or less.

a sewer does not meet the legal definition of tangible property. however, the publication should not include  "tangible" since the actual code section doesn't  (never know when you can trust IRS publications since they are not law and actually have no standing in tax court)  

168(k)(2) Qualified property
For purposes of this subsection—
(A)In general
The term “qualified property” means property—
(i)
(I)to which this section applies which has a recovery period of 20 years or less,

so you are entitled to a deduction but another question is the proper year since you aren't supposed to depreciate an asset until it is placed into service. 

I

[Opus 17]

I believe you are correct that special assessments for property improvements are added to the cost basis, and depreciated if this is rental property, and not expensed.  Normally, you start to depreciate improvements when they are placed in service (when the work is done) regardless of when you paid for it.  So I would list the work as a single $10,000 improvement performed either in 2022 or 2023, not as two split improvements.

As mentioned by others, this might qualify for bonus depreciation.  I haven't educated myself on those rules so I can't comment directly. 

[Carl]

You do not depreciate a HOA assessment, it is entered as an expense only.

Not always true. It depends on what the assessment is for. Typically, assessments are for property improvements to the common areas such as halways, walkways, building access points, etc. Depending on the circumstances, it gets added to the cost basis and depreciated over time.

[TaxBizLady]

By reference to IRS Publication 530, the items you have identified as "Special Assessment" by the HOA are not deductible because these are considered for "local benefit" not imposed by government agency.

Publication 527 page 22 under Special Situations: Condominiums comments, "Special rules apply if you rent your condominium to others. You can deduct as rental expenses all the expenses discussed in chapters 1 and 2. In addition, you can deduct any dues or assessments paid for maintenance of the common elements. You can’t deduct special assessments you pay to a condominium management corporation for improvements. However, you may be able to recover your share of the cost of any improvement by taking depreciation."

In TurboTax this falls under a rental asset and "land improvement". Be sure to clearly describe the improvement to help IRS evaluate the depreciation deduction you are claiming.