HOA Special Assessments deductible?

[bgal380]

Our Homeowners Association billed a Special Assessment to stabilize land on community property that benefited the entire community.  It was $1800.00 per household.  Is this deductible?

[Opus 17 · Accepted solution]

No, it adds to your cost basis, which may affect your capital gains calculation when you sell.

[betsey_white]

Where do you include this information in the return?

[Opus 17]

You don't.  If you pay for improvements or upgrades to your personal home, whether yourself directly or through an HOA assessment for improvements, it is not entered on your tax return.  Instead, keep records of the assessment for as long as you own the home.  It may benefit you by reducing your capital gains tax when you sell.

[betsey_white]

We did sell the property in 2018.  It was a rental for 2 years before we sold it (it was our primary residence prior to that) and we had to put $12,500 into an escrow hold due to a pending special assessment.  So that $12,500 came right off the top of our proceeds.

[Opus 17]

In that case it is treated as a reduction or adjustment to the selling price, along with your real estate commission and certain other selling expenses.

[betsey_white]

Thank you.  One final question: would I take that off the top of the selling price or reflect it as one of the selling expenses?

[Opus 17]

It should have the same result either way.  If you got a 1099-S form reporting the selling price, you should not change the selling price in the tax return because that may trigger an IRS mis-match letter.

[subhiandrews]

You should total up all the yearly special assessments on the home and use it to reduce the capital gains when you sell? I have sold my property after owning it for 10 years.

[Vanessa A]

Yes and no.  You would total up the HOA fees but not tax assessments.  You would then add this to the cost basis of your home which will decrease your profit in turn it will also decrease your capital gains. 

[wajake41]

We rent out our condo. I thought that a special assessment needed  be added to the unit's basis and depreciated over 27.5 years. I understand that it cannot be expensed.

[Carl]

For residential rental property, it's added to the cost basis. To do that, enter the assessment as a separate asset in the assets/depreciation section. Weather it gets classified as a property improvement that's depreciated over 27.5 years, or a land improvement that gets depreciated over 15 years (or not depreciated at all) depends on the specifics of what the assessment was for.

[wajake41]

My understanding is that for a rental property, the added basis must be depreciated over the life of the improvement. If depreciation is not taken in any tax year then that depreciated amount is lost. 

i.e. if no yearly depreciation is taken then all the basis from the special assessment will be lost at the end of the improvement's life.  Is my understanding of this correct? 

[Carl]

My understanding is that for a rental property, the added basis must be depreciated over the life of the improvement.

Correct. But land is not depreciated. However, a number of "land improvements" are depreciated. An incomplete list is included in IRS publication 946.

If depreciation is not taken in any tax year then that depreciated amount is lost.

In a sense, yes. But when the error is discovered, it can be corrected by either amending the return, or by filing IRS Form 3115 to correct things. Which you do, depends on the circumstances and time frame.

i.e. if no yearly depreciation is taken then all the basis from the special assessment will be lost at the end of the improvement's life. Is my understanding of this correct?

Somewhat, yes. So if you have a 15 year property and you don't depreciate it while it's in service the full 15 years and sell it, your cost basis on that asset would basically be zero and you'll be taxed on the full sales price of that asset. But do keep in mind that tax rates for both capital gains and depreciation recapture can be anywhere from 0% on up, with a maximum of 25% for recaptured depreciation.

For capital gains, it's my understanding that most people will fall in the 15% range.

[Laraness]

Good day. My siblings and I inherited my mother's home, along with a slough of unpaid HOA fees. After a year of probate, we sold the house; and based on the FMV at the time of my mother's death, we sold with capital gains (even after figuring improvement costs, legal fees, etc necessary to sell). In order to sell, we had to settle the accumulated HOA fees (including late fees) and property taxes. As far as I can tell, the property taxes we paid are deductible; but is our payment of the HOA fees deductible or can it be used to increase the cost basis? (Note: we did not live in the house, but did not rent it either, and we owned it less than two years). Many thanks.