CDD fees are usually not tax-deductible. Even though these fees are like property taxes, there’s a key difference that means they usually don’t qualify for a deduction under the IRS rules.
Deducting CDD Fees vs. Property Taxes
CDD stands for Community Development District. Depending on where you live, CDD fees could be charged by either the government or a private entity like the builder of the community.
CDD fees usually fund infrastructure or amenities for a specific community. This can include anything from roads to a community pool.
You may pay CDD fees once when moving into a new neighborhood, for the first few years a community exists, every year, or for specific projects.
The key difference between CDD fees and property taxes is that CDD fees are usually a fixed amount per home. For example, instead of paying 1% of your home’s value, you pay a flat $500.
Under the IRS rules for state and local property tax deductions, you can generally only deduct ad valorem taxes. Ad valorem means a tax based on the value of your property. That’s why you can deduct percentage property taxes but not fixed fees like CDD fees or even things like fixed fire department charges.
To be clear, the difference isn’t whether or not CDD fees are included in your property tax bill or paid separately. Your property tax bill may contain CDD fees and other charges that aren’t deductible.
And, of course, if you’re paying a fee to a private business instead of a government, that will almost never be deductible no matter how the fee is charged.
Investment and Rental Properties
If you have an investment or rental property, your CDD fees may be deductible as an investment or business expense. That’s because you can generally deduct all ordinary and necessary expenses of running your business.
The rules above on what property taxes you can deduct are for your personal itemized deductions and don’t affect business properties.
Why do people deduct CDD fees?
A lot of people don’t take the time to learn details about property taxes.
They might know property taxes are deductible and think CDD fees are property taxes. They also might not pay close attention to their property tax bill and deduct the entire amount of the check they wrote to the property tax collector.
If you deduct CDD fees when you’re not supposed to, you could have to pay back taxes, interest, and penalties.
How can the IRS find out? They randomly choose people to audit, or you could get audited over other issues they found on your tax return.
The IRS also compares the deductions you claim against other homeowners. If they notice some people in an area are deducting more than others, they might take a closer look at why.
Finally, if they catch one person in a neighborhood cheating, they might look to see if other people who live there are doing the same thing.