If you live in a planned community, there is a good chance questions have come up about taxes and if your community needs to file them. We’ve heard many people admit that they didn’t realize their community needed to file tax returns. Even though it isn’t an uncommon problem for self-managed associations, depending on how your community is legally organized, it can lead to problems with the IRS. We know no one wants problems with the IRS, so we’ve put together a quick guide to help get your community tax questions resolved.
How is your HOA legally organized?
Before you can know how to file taxes, you need to know how the HOA is legally recognized. For federal purposes, associations are viewed as corporations. Even if your community was created as an association or non-profit for state reasons, the federal government still considers it a corporation. In very rare cases, the federal government may consider an HOA a nonprofit if it has filed form 1024 with the IRS, utilizing tax code section 501(c)(4). This is an expensive, difficult, and rare recognition to receive.
Can our HOA bypass complicated corporate taxes and Form 1120?
Yes, most can. Tax code allows most HOAs to skip Form 1120 and avoid complicated corporate taxes by making a special election. Section 528 allows HOAs that meet certain requirements to file Form 1120-H, an income tax form designed for homeowner associations. If your HOA qualifies, filing this way means only the non-exempt income is taxable.
Which HOAs qualify for Section 528?
Although most HOAs qualify for Section 528, a community must meet the following:
- At least 60% of annual revenue must be exempt-function income, which includes memberships dues, assessments, fees and interest on those fees
- 90% of the HOA’s bills must be for management, maintenance, acquisition and HOA construction costs
Related: Dealing with Difficult Residents in an HOA Community
Remember, every situation is different and your community may have unique tax issues, so rather than trying to figure it out yourself we encourage you to seek the expertise of a property management company and a good CPA. If you don’t already have a property management company you trust, we’d love to help. Between our professional management team and our CPA, we are confident we can help your board navigate taxes and anything else your community needs. For more information, contact us at Spectrum!
When filing form 1120-H only exempt function income is tax-free. Exempt function is defined as being assessments billed as a result of membership in the organization, and is unilaterally charged to all members. This includes assessment income. What this does NOT include is “per use” fees. Thus, if the Association charges members fees to use common areas, those fees are taxable on 1120-H.
Our HOA just became a non-profit corporation. They are now telling us our fees are tax deductible. I don’t think this is correct. Please comment.
John Davis:
Assessments are NOT tax deductible. The fact that the HOA is now an NPO doesn’t cause your payment to become a deductible contribution. It remains a monthly assessment expense to the homeowner.
Is there a minimum income a HOA need to generate that requir them to file? In my community in VA we only have 24 homes with no amenities. But we do collect one an annual assessment fee to handle landscape on common areas. Do we have to file?
Our HOA is the same, only 15 homes and no amenities. We have never filed a tax return. In reading through this we have no income so therefore owe no tax. We only collect for mowing fees for a unified mowing of our individual owned land facing the street, so there is no income subject to tax. If we fess up, do we have to pay any penalties for many years of not filing a return, even if no tax owed?