Is Interest on an Association Loan Deductible by the Homeowner?
Is Interest on an Association Loan Deductible by the Homeowner?
Question- Our Association has taken out a loan to replace the roof and to make other repairs. A special assessment has been levied against the members to repay the loan. We are making monthly payments on the special assessment for the next five years. The amount of the monthly payment is calculated using an amortization table based upon our original portion of the loan (e.g. the loan is for $100,000 and we have 20 homeowners so each of us owes $5,000). Owners could choose to pay the amount in full or make payments. The payments include an amount for principal and interest. I feel that the interest on my portion of the loan should be deductible, but the Association’s management company does not provide this information to us at the end of the year. How am I to know what to deduct on my tax return?
Answer- The reason you are not being provided with this information is that the interest is not deductible by you personally. The “short” answer is that it is not deductible because the loan is not secured by your property; it is secured by the special assessment.
Below is a more detailed explanation (for those so inclined to pursue the matter in more depth) which was given by the IRS in February, 1997 as an answer to a taxpayer regarding SBA interest on a loan for Northridge earthquake damage. Please note that this concept would apply to most types of loans taken out by an association. There may be a few exceptions, and a qualified tax preparer should be consulted in those instances.
“… The interest will not be deductible by the members of the association. Generally, a taxpayer is allowed an interest deduction only for interest on their own debt, not on the debts of another. If the interest were arguably passed through by an … association, what authority would a member rely on for their deduction? There is little question that the association’s pass through would be neither a trade or business nor investment of the member. Therefore, the only character of deductible interest would be qualified residence interest.
Repairs to association property would clearly not meet the definition of acquisition debt. Therefore, the debt would be considered equity debt. Even if sufficient equity exits in each member’s residence, is this debt secured by that residence?… (what about) if the association placed a lien against the property as a result of the loan?… Debt is not treated as secured by a qualified residence, however, if it is secured solely by virtue of a lien upon the general assets of the taxpayer or by a security interest that attaches to the property without the debtor’s consent. If (the lender) has not the power to force a sale of a member’s residence on default of the loan, the residence is not security for that loan. Therefore, the interest would not be deductible as qualified residence interest.”