Do You Pay Taxes on Condos? What to Know

Owning a condominium means you will pay taxes, similar to owners of single-family houses. A condo owner’s tax obligations include annual local property taxes and potential federal and state income taxes. The amount and type of tax depend on how the property is used and eventually sold.

Understanding Condo Property Taxes

Condo owners pay property taxes directly to their local government to fund public services like schools and infrastructure. A condo owner’s property tax bill is based on two assessments. The first is a tax on the individual unit, and the second is a tax on the owner’s fractional interest in the common elements of the complex.

Common elements include shared amenities like the land, hallways, elevators, and swimming pools. A legal document called a Condominium Declaration assigns each unit a specific percentage of ownership in these common areas. This percentage is used by local tax assessors to determine each unit’s share of the total value of the common elements.

The combined value of the individual unit and its share of the common elements forms the basis for the owner’s property tax bill. The condominium association or HOA does not receive a separate property tax bill for the common areas. This is because their value is already allocated among the individual unit owners.

The local assessor’s office performs this valuation on a recurring cycle. The assessed value, which is a percentage of the fair market value, is multiplied by the local tax rate to determine the final tax liability. Changes in the real estate market, local budgets, and major improvements can influence the amount of property tax a condo owner pays.

Tax Deductions for Condo Owners

Condo owners who use their property as a primary residence can lower their federal and state income tax liability with certain deductions. These benefits are available to taxpayers who itemize their deductions instead of taking the standard deduction. To be beneficial, total itemized deductions must exceed the standard deduction amount for the tax year.

The deduction for state and local taxes (SALT) includes property taxes paid on the condominium. Federal law caps the total SALT deduction at $10,000 per household per year. This cap applies to the combined total of property taxes and either state income or sales taxes.

Homeowners can also deduct mortgage interest. The interest paid on the first $750,000 of mortgage debt used to buy, build, or improve a main or second home is deductible. Your lender will send you Form 1098 each year, which reports the amount of mortgage interest you have paid.

For a primary residence, regular Homeowners Association (HOA) fees are a personal living expense and are not deductible on your federal income tax return. These fees cover the maintenance of common areas. If the HOA imposes a special assessment for a capital improvement, that cost may be added to the property’s cost basis, which is relevant when you sell.

Income Tax on Rental Condos

Owners who rent out their condos follow a different set of tax rules. All rental income must be reported to the IRS on Schedule E. Rental income includes monthly rent, advance rent, security deposits not returned to tenants, and any expenses paid by the tenant on the owner’s behalf.

Owners can deduct expenses associated with the rental activity to lower their taxable rental income. Unlike a primary residence, HOA fees for a rental condo are fully deductible. Other deductible expenses include:

• Property management fees
• Advertising costs
• Maintenance and repair costs for the unit
• Utilities paid by the owner
• Insurance premiums

Depreciation is another deduction for rental properties. The IRS allows owners to deduct a portion of the condo’s cost basis each year over its 27.5-year useful life for a residential rental property. This deduction accounts for wear and tear on the building, not the land. The annual depreciation deduction reduces your taxable income but also lowers your property’s cost basis.

Taxes When Selling a Condo

If you sell your condo for more than you paid, the profit is a capital gain and may be subject to tax. The gain is calculated by subtracting the condo’s cost basis from its sale price. The cost basis includes the original purchase price, certain closing costs, and the cost of any capital improvements made during ownership.

For a primary residence, tax law provides an exclusion that can reduce or eliminate capital gains tax. Under Section 121 of the Internal Revenue Code, a single individual can exclude up to $250,000 of capital gain, and a married couple filing jointly can exclude up to $500,000. To qualify, you must have owned the condo and lived in it as your principal residence for at least two of the five years before the sale.

The two years of use do not have to be continuous. Any gain that exceeds the exclusion amount is taxed at long-term capital gains rates if you owned the condo for more than one year. This exclusion can only be claimed once every two years.