HOA special assessment taxes: What you need to know
If you live in a residential community or are looking to purchase a home in a homeowner association (HOA), then you are most likely familiar with the term “HOA fees.” If you are not, we encourage you to check out our recent article What is an HOA fee? And what does your HOA fee cover?
While you know you are obligated to pay these fees, you may or may not be familiar with special assessment taxes and fees.
What is a special assessment tax?A special assessment tax is distinct from regular assessments imposed by an HOA. In real estate, special assessment taxes refer to extra property taxes imposed by the local government to fund neighborhood and property improvement projects.
The additional tax charged is earmarked for a specific area, commonly known as a special assessment district. Only property owners in this designated area are required to pay a special assessment tax, which may or may not be listed on the non-ad Valorem tax line of the tax bill.
Typically, a special assessment tax is enforced through a special assessment tax lien, which is recorded at the local registry of deeds. This lien guarantees that the local government will be paid for the work performed.
Examples of projects that could be allocated to a special assessment tax include:
- Road and sidewalk paving
- Water or sewer lines
- Public safety projects
- Recreational projects such as building baseball fields, basketball courts, jogging trails, and bike lanes.
- Parking areas
- Other miscellaneous improvement projects
What is an HOA special assessment?An HOA special assessment differs from a special assessment tax since it is implemented through the HOA. It refers to a specific sum of money that every property owner within an HOA-run community must pay for essential upgrades or repairs. These assessments are usually one-time fees that cater to necessary repairs, alterations, or capital improvement projects.
If your HOA has recently announced a special assessment, it is understandable to be worried. Typically, these assessments are implemented to handle unforeseen expenses that arise within the development.
Capital Improvement Assessments vs. Special AssessmentCapital improvement assessments are sometimes mistaken for special assessments but differ slightly in their purpose. Capital improvement assessments focus on enhancing the community areas, which may involve structural changes.
The objective of a capital improvement assessment is to boost the value of the homes in the development and offer more amenities to residents. Typically, these projects are more expensive, so the HOA must exercise caution before implementing them.
Examples of capital improvement projects may include constructing a fitness center, clubhouse, tennis courts, or additional parking lots. These improvements are made to common areas that all unit owners can utilize, and such HOA assessments enhance the property values for all community members.
The HOA board typically proposes capital improvement projects; all property owners will discuss the assessment fees. A vote is then held to ensure that a majority of owners approve of the capital expenditures.
Are HOA special assessments tax deductible?Special assessments levied on members of an HOA are not eligible for tax deductions. However, if the unit being assessed is a rental property, then the special assessment may qualify as a tax-deductible expense (subject to the agreement of the owner's tax advisor).
Suppose a unit owner wants to make the interest on their special assessment deductible. In that case, they may obtain a second mortgage from a bank or financial institution and pay their share of the assessment in full. But involving the HOA to make interest payments tax-deductible for all homeowners is unclear. This would require conducting title searches, recording trust deed loans, placing liens, and more. Although associations may have some experience with assessment collections, performing these tasks on a large scale may not be practical.
How to deal with a special assessmentSpecial assessments usually arise due to unexpected failures or issues that have occurred. For instance, the roof of the complex building may have been damaged by weather, and insurance coverage may not be adequate. Even the most proficient homeowner associations may be caught off guard by unexpected events.
However, this can also occur with poorly managed HOAs that have failed to budget effectively. That's why partnering with a professional management company is crucial to ensure your community’s financials and reserves are in good standing. Additionally, it is highly recommended that homeowners review their HOA's financial information to ensure the association has adequate reserve funds to handle unexpected events. This can help you avoid being hit with unexpected special assessments that could impact your finances.
Monthly fees and HOA special assessmentsWhile low HOA fees may seem attractive, there are drawbacks, especially regarding special assessments. Lower HOA fees may allow you to qualify for a more significant mortgage, as your lender will factor in your other monthly expenses to determine how much you can afford to pay each month. However, homeowner associations with lower fees may need more funds to handle significant repairs or improvement projects that could increase the value of your home.
On the other hand, it's easy to assume that higher HOA fees will protect you from expensive special assessments since the association should have enough funds to handle repairs and upgrades without requiring homeowners to pay more. However, this is not always the case. Even with higher fees, if the association has not collected sufficient funds from everyone, their financial situation may not be as stable as you might think. Higher HOA fees may still result in an expensive special assessment if the funds are not well-managed.
Realistically, special assessments will be necessary at least once during the lifetime of your community as wear and tear and natural disasters occur. The important part is being involved with board members and fellow residents and ensuring the community is financially sound to reduce its impact on homeowners.
Click here to learn more about how a professional management company like FirstService Residential can support your community.