Legal Insights

Federal tax relief may be on the way for homeowners in HOA communities

By: March 30, 2016

It is part of the American Dream to own a home. But along with home ownership comes the obligation to pay property taxes. The government collects property taxes to pay for, among other things, maintenance of roads, street lighting, community landscaping, parks and city code enforcement. But starting in approximately 1960, local governments began teaming up with private developers to create homeowner associations. Today, more than 66 million people in the United States live in homeowners associations, condominium communities, cooperatives and other planned communities and the number grows each year. By statute, state legislatures have given certain governmental powers to HOAs. A homeowners association operates much like a local city government. The community elects a board of directors to represent them. The Board then makes decisions for the community. The community is governed by Covenants, Conditions and Restrictions (CC&Rs) which allow the Board to collect dues and assessments. These dues and assessments are then used by the HOA to maintain roads, street lighting, community landscaping, parks and for CC&R enforcement. In a very real sense an HOA community is a localized form of government that collects taxes and is responsible for community maintenance.

So, in creating HOA communities, local governments have transferred the responsibility to maintain roads, street lighting, community landscaping, parks and code enforcement to the HOAs. But the government continues to collect property taxes from those in HOA communities at the same rate as those that don’t live in HOA communities. The proliferation of HOAs has resulted in a cost savings to local governments in two ways. First, by requiring developers to build “public improvements” such as parks and then passing the cost of maintenance of the improvements to the homeowners; and secondly, by HOAs being responsible for the cost of maintaining infrastructures that would normally be maintained by the municipality.

So, if homeowners in HOA communities already pay dues and assessments to their association for maintenance of roads, parks and other amenities, then why are they required to pay property taxes? Aren’t they getting taxed twice for the same services? That’s what many homeowners believe and their complaints have been heard at the Federal level. Two U.S. Congressional Representatives are co-sponsoring a bill to provide a special federal tax deduction for owners of property in homeowners associations. On March 3, 2016 U.S. Representatives Anna G. Eshoo (D-CA) and Mike Thompson (D-CA) introduced the bill “Helping our Middle-Income Earners (HOME) Act.” If passed, H.R. 4696 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.

According to the sponsors, “[t]he HOME Act recognizes that millions of middle class homeowners are struggling to keep up with rising household expenses like child care, college tuition, health care, mortgage and community assessments” and the bill goes “a long way by providing relief from this tax burden on millions of middle class families.”

Although no companion bill has been introduced in the Senate, the bill has attracted the attention and has gained the support of the Community Association Institute, a national organization that advocates on behalf of HOA communities. “CAI applauds Rep. Eshoo for her efforts to make homeownership more affordable and for recognizing the inequity of double-taxation faced by homeowners in America’s community associations,” said CAI Chief Executive Officer Thomas M. Skiba, CAE. “We look forward to working with Reps. Eshoo and Thompson to ensure this legislation is a net gain for the more than 66 million Americans who live in community associations,” Skiba added.  The HOME Act would lighten the financial burden of homeowners and make homeownership more affordable and attainable for more families.

There is no denying that there is some taxation inequity for homeowners living in HOA communities. But H.R. 4696 still has a long way to go. It was recently referred to the House Committee on Ways and Means and only time will tell if the bill will gain enough support to pass. But there are over 66 million hard-working homeowners that are hoping it gets traction.