Not sure if the tax forum is the correct section to post this. Its accounting, but eventually about tax.
How should Special Assessments be tracked in Quickbooks? And how do I depreciate/tax it?
My HOA created a special assessment of $5000 over 3 years. So $138.89/mo. For roof repair.
Given that repairs like these need to be depreciated (property improvement), I can't enter the $5000 as an expense for the year, nor the monthly $138.89.
Does each year's total payment ($138.89x12 = $1666.68) need to be depreciated over 27.5yrs at the end of each year. Or should I start depreciating the full $5000 from first year even if I haven't made the full $5000 payment yet?
I believe it should be the latter, as any special assessment payment plan should be independent of the of the actual improvement.
I would like to hear your thoughts.
Given the HOA effectively owns the roof, I wouldn't try to capitalize the roof and then depreciate it. I would just expense the HOA fees.
If you really want to capitalize it, depreciating the full amount from the start implies you are using accrual accounting. Most SF owners use cash accounting. To do it correctly in cash accounting, you should capitalize each $138 payment. That would be a total mess.
Whether you capitalize it or expense it, the other question you should ask is, what is the risk of choosing either route? Odds are your depreciation exceeds your cash flow, so even if the IRS said you did it wrong there is no impact to your taxes, and therefore no penalty, no risk. Take the easier route.
Sounds like you don't have a CPA. That would be a quick and easy question for them and they would understand your personal situation. If you don't have a CPA, I highly recommend getting one.
I have a different perspective than @Greg Scott . If the assessment was for a small repair or maintenace item with no lasting benefit beyond one year, I would expense the assessment as it is paid. Because each individual owner is being assessed a proportionate share of the excess cost of a major improvement project with a long term benefit, I would capitalize and depreciate the assessment.
You are assessed the amount in full now but you are being offered an installment payment plan. Treat the assessment for taxes as if you paid the entire assessment in full now and did not spread out the payments. Enter the $5000 roof assessment in your depreciation schedule as a new 27.5 year asset and begin depreciation from the assessment date.
Just how I see it.
I don't use Quickbooks, but if i did, I would create an assset account for the roof and create a liability account. I would offset an initial $5000 debit to the liability account with a $5000 credit to the asset account. As you pay each monthly installment for the special assessment, debit your cash account and credit your liablity account.
Updated about 1 year ago
My response assumed this is an in service rental property and not your primary or secondary home.
The roof is not your property, technically, therefore there is no depreciation transaction here.
How you handle this from an accounting and tax standpoint really depends on the answer to this question:
When The special assessment of $5000 is assessed to you are you responsible for paying it off, in full, if and when title transfers? So let's say you sell your property 6 months after you begin making payments. Will you have to finish paying it off at closing? Or will the payments transfer to the new owner?
If you will be responsible for the entire amount, even if you sell the house, then you record an HOA Dues Expense (NOT AN ASSET) of $5000 and a corresponding liability of $5000. Future payments are then recorded against the liability. If the HOA is charging you interest (it would be very unusual for them not to, but it's possible), then you also would expense the interest portion as Other Interest Expense as you make the payments.
If the responsibility for payments transfers at title, then you expense the payments (and any interest added as explained above) as HOA Dues Expense as you make the payments.
Thank you all for your responses.
@Greg Scott I used to have a CPA, but I felt I had to constantly fish him for ideas. I will eventually get another CPA, but I like to have an understanding of how things work (accounting wise) while I only have one property.
@Dave Toelkes Yes, it is a rental property. I was thinking of doing it along the lines of what you mentioned.
I was originally entering them as HOA Dues Expense, but while reading over the IRS publications I saw:
"... You can’t deduct special assessments you pay to a condominium management corporation for improvements. However, you may be able to recover your share of the cost of any improvement by taking depreciation."
@Linda Weygant If I were to sell the property within 6 months, the remainder of payments will transfer to new owner.
Is the roof not considered a common element? Hence I own a share of it. In your structure, if I were to keep the property for the 3+ years, I would have expensed the full $5000 on year 3. Don't I need to expense it over 27.5 yrs?
Good find on the IRS comment. That clearly spells out what you would need to do.
Have you looked at what your taxable income would be under any of the scenarios mentioned above? I suspect the answer actually ends up the same. Depreciation fully offsets income so zero taxes (at least for now.)
If depreciated over 27.5 years the depreciation expense comes out lower than expensing it as a HOA Due.
Create Lasting Wealth Through Real Estate
Join the millions of people achieving financial freedom through the power of real estate investing