H.R. 4696: Unfair Tax Treatment Under The Law

House Resolution 4696, which has been tagged with the politically palatable moniker, Helping Our Middle-Income Earners (H.O.M.E.) Act, is being touted by industry insiders as a piece of consumer-friendly legislation to help beleaguered homeowners who just so happen to live in HOAs.

According to the party line these poor, over-burdened homeowners are being subjected to a form of double-taxation by virtue of the fact that they must pay property taxes on the home they own that is within an HOA, in addition to having to pay assessments to the HOA. Supporters of the bill argue that this amounts to a form of double-taxation because the assessments these homeowners pay to their HOA are used to pay for services that homeowners who do not live in HOAs receive from local governments in the form of municipal services. Such services being paid for with the property taxes that non-HOA members pay.

Therefore, the supporters of H.R. 4696 argue, homeowners who pay “qualifying assessments” to an HOA should be allowed to deduct those assessments from their federal income tax return up to a maximum of $5,000 per year. The bill limits the homeowners who would qualify for this very favorable tax treatment to those taxpayers who report no more than $115,000 per year in household income on a joint tax return. Single filers are limited to $100,000/year in earnings, both of which are income levels that are roughly two times the current median household income in the United States.

This argument, which has been around almost as long as HOAs have been in existence, is specious at best and frankly disingenuous, given who the real benefactors would be if this proposed legislation becomes law. Those benefactors include, first and foremost, the management companies whose revenue is generated by providing a wide-ranging menu of services to the homeowners associations that they manage. Which might help to explain why this bill is being aggressively supported by the management industry’s legislative watch-dog and lobbying arm, the Community Associations Institute, or CAI as the organization is commonly known.

Why you ask, would the HOA Detective be opposed to a piece of legislation that appears to give a leg up to the oppressed masses, who just so happen to live in a homeowners association?  After all, aren’t these working-class Americans over-burdened with too many taxes; too much government regulation; inefficient government bureaucracies and low-quality government services, just like the rest of us? The answer is both yes and no!

The arguments against this legislation are many, so let’s begin with the most obvious and fundamental argument of all:

Even if it could be shown that the assessments an HOA member pays are used to pay for the same services that would otherwise be paid for with property taxes – this being the cornerstone of the argument in favor of H.R. 4696 – the fact of the matter is that the services which might otherwise be paid for with property taxes and/or with HOA assessments, are not, in the majority of cases, services that the federal government is responsible for providing. Therefore, the federal government should not be granting any sort of tax benefit to offset this alleged form of “double-taxation.”

If it were in fact true (which it is isn’t) that HOA assessments were being used to pay for services that would otherwise be paid for with property taxes, then it should be the local government that collects those property taxes  which should grant some form of tax relief to offset any double-taxation that might result from paying HOA assessments in addition to property taxes.

To expect the federal government to grant a special tax deduction to a relatively small percentage of the population, when the federal government isn’t even remotely involved in the taxation process that is alleged to result in this double-taxation, is disingenuous and patently unfair to the taxpayers who pay federal income taxes but do not live in HOAs.

The second argument in opposition to H.R. 4696 requires a certain amount of knowledge about homeowners associations and how they spend their money. The first thing that must be understood is that all HOAs are not created equal and because they are not created equal it means that they do not all spend the assessment revenues they receive from the members on the same type of expenses.  Associations that consist of attached housing such as condominiums and town home developments will typically spend the majority of the assessment revenue they receive on three things:

  1. Management services & administrative expenses
  2. Property maintenance
  3. Utilities

Property maintenance often includes a broad range of expenditures including maintenance of recreational amenities such as swimming pools and most significantly landscape maintenance. Many homeowners associations end up spending more money on landscape maintenance than on any other line item in their annual budget. So to suggest that these homeowners should be allowed to deduct the dues they pay to their HOA, when a significant portion of those assessments may be being used to pay for nothing more than mowing the grass and weeding the flower beds is utterly ridiculous.

Likewise, in the case of many condominiums, in particular those housed in high-rise or “vertically oriented” structures, the Association’s operating budget will often times include funding to pay for almost all of the utilities that are used by the residents. In many instances this will include internet and cable TV service and in almost all such circumstances it includes water and sewer charges. Although most modern condominiums are individually metered for electricity it is often the case that gas utility charges are captured in the HOA budget.

Homeowners associations that consist of the more traditional single-family home/subdivision type of development are not exempt from criticism. These organizations typically spend far more money on landscaping as a percentage of total assessments than the average condominium or attached housing development. They are also prone to spending much more of their annual revenue on maintaining recreational amenities that include not only the ubiquitous association-owned swimming pool/s but numerous other amenities such as parks, playgrounds, tennis, basketball and sports courts; gaming fields such as soccer and baseball fields; walking and biking paths; and even the occasional golf course!

And while it may be true that some of these recreational amenities are things that might otherwise be paid for with the property taxes that one pays on their home, the fact is that in the case of an HOA these amenities are privately owned and are operated exclusively for the benefit of the homeowners who are members of the HOA. This is even true in the case of most privately maintained roads, which like most recreational amenities owned by an HOA, are under lock and key 24 hours a day and may only be accessed by the HOA’s membership.

In the next installment we will examine an operating budget for a condominium and for a traditional planned development that contains single-family homes to see just exactly what the typical HOA spends its money on.