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!