Federal Taxation of HOAs and Condo Associations

Section 1: Overview — Associations are taxable corporations

Incorporating as a nonprofit corporation under state law does not produce federal income tax exemption. That single misunderstanding drives most of the tax questions boards ask, and the correction is where this page starts: federal law ordinarily treats a community association as a taxable corporation.¹ The association takes one of two filing paths each year. It files Form 1120 as an ordinary corporation, or it files Form 1120-H under an election that Internal Revenue Code § 528 provides.² The § 528 election is annual, and the association makes it by filing Form 1120-H for the year; it is not a permanent status the association holds.³ Some income is taxable on either path. Interest earned on operating and reserve accounts is the item boards most often miss, followed by cell tower and antenna leases, easement payments, nonmember facility rentals, and laundry and vending revenue.⁴ Exemption under § 501(c)(4) or § 501(c)(7) reaches very few associations and works as a narrow exception rather than a plan.⁵ Qualification for the election is tested year by year, and the better path depends on the association's income mix, so the association makes the decision annually with its CPA. This page is not tax advice; associations should engage a CPA experienced with association returns. The sections below set out the statutory framework, the filing and election mechanics, recent activity, and the interaction with state law.

Section 2: The statutory and regulatory framework

2A. Default corporate status and the § 528 election

A community association organized under a state nonprofit corporation statute is still a corporation for federal income tax purposes. State nonprofit status affects state corporate law and can matter for state tax, but by itself it confers no federal income tax exemption; federal exemption requires separate qualification under a provision of the Internal Revenue Code.⁶ Absent a qualifying election, the association files Form 1120 and pays tax as an ordinary corporation.

Section 528, which Congress enacted in 1976, gives qualifying associations an alternative.¹ It applies to three defined organization types: condominium management associations, residential real estate management associations, and timeshare associations.¹ To qualify as a "homeowners association" eligible for the election in a given year, § 528(c) requires that the organization be organized and operated to provide for the acquisition, construction, management, maintenance, and care of association property; that 60 percent or more of its gross income for the year consist solely of membership dues, fees, or assessments (from owners of residential units for a condominium management association, owners of residences or residential lots for a residential real estate management association, or owners of timeshare rights or interests for a timeshare association); that 90 percent or more of its expenditures for the year go to the acquisition, construction, management, maintenance, and care of association property (and, for a timeshare association, to activities provided to or on behalf of members); and that no part of net earnings inure to any private shareholder or individual, other than through acquiring or providing association property or a rebate of excess dues, fees, or assessments.¹ A substantiality test also applies: under Treas. Reg. § 1.528-4, a condominium management association counts as substantially residential if individuals use at least 85 percent of the total square footage of all units in the project for residential purposes, while a residential real estate management association meets the test if at least 85 percent of the lots are zoned for residential purposes.⁷ The formulations differ by association type, which is where secondary summaries frequently go wrong. The association makes the election by filing a properly completed Form 1120-H, and it must make a separate election for each taxable year.³ If an association misses the election by the return due date, the Form 1120-H instructions describe an automatic 12-month extension to make the § 528 election under Treas. Reg. § 301.9100-2, provided the association takes corrective action within 12 months of the due date (including extensions) of the return.²

2B. Form 1120-H mechanics

Under the election, the association pays tax only on its "homeowners association taxable income," which is gross income excluding exempt-function income, reduced by deductions directly connected to producing that non-exempt income.¹ The tax runs at a flat 30 percent of that income for condominium management associations and residential real estate management associations, and 32 percent for timeshare associations, with a specific deduction of $100 and no net operating loss deduction.¹ Both the statute and the current Form 1120-H and its instructions carry the 30 percent and 32 percent rates and the $100 deduction.² Exempt-function income means amounts the association receives as membership dues, fees, or assessments from owners in their capacity as owners, and those amounts ordinarily fall outside the taxable base on this path.⁴ The practical trade-off runs this way: Form 1120-H simplifies the return and shields member assessments from tax, but it applies a higher flat rate to the smaller non-exempt base than the graduated-then-flat corporate rate that would apply on Form 1120. The election does not make the association tax-exempt and does not eliminate the return. The association still files, and it still pays tax on its non-exempt income.¹

2C. The Form 1120 path and the revenue rulings

On the Form 1120 path, the association pays tax as an ordinary corporation at the flat 21 percent corporate rate on its taxable income.⁸ Because a community association is a membership organization, IRC § 277 requires it to account separately for member and nonmember activity: it may deduct expenses attributable to furnishing goods or services to members only to the extent of income from members, and any excess carries to the next year rather than offsetting nonmember income such as investment income.⁹ The IRS confirmed in Rev. Rul. 2003-73 that member losses cannot offset nonmember income and that investment income is generally nonmember income for this purpose.¹⁰

Two lines of guidance shape the Form 1120 path. Rev. Rul. 70-604 permits the members of an association to elect, at a membership meeting, to apply the excess of membership assessments over expenses to the following year's assessments or to refund it to members, so that the excess is not treated as taxable income.¹¹ This is a members' election, and it requires an actual, documented vote by the membership, not a board resolution written after the fact; the IRS has treated it as a single-year carryover rather than a device for permanently deferring income year after year.¹¹ Separately, Rev. Ruls. 75-370 and 75-371 hold that special assessments collected for specific capital improvements, earmarked and segregated for that purpose, are contributions to the association's capital under IRC § 118 rather than income.¹²

Exemption is a narrow exception. Under § 501(c)(4), the IRS position running through Rev. Rul. 74-99 holds that a homeowners association qualifies as a social welfare organization only if it serves a "community" bearing a reasonably recognizable relationship to an area ordinarily identified as governmental, conducts no activities directed to the exterior maintenance of private residences, and owns and maintains common areas open to the general public rather than restricted to members.⁵ Gated exclusivity and member-only amenities generally defeat qualification.⁵ Section 501(c)(7) social club status fits only a small number of associations that are organized for recreation and conduct genuine social activities.¹³ Reserve contributions and reserve interest sit alongside the reserve-funding standards discussed on the Fannie Mae and Freddie Mac page; reserve interest is generally taxable on either return, and contributions to reserves for capital improvements may qualify as capital under the rulings above when the association meets the requirements.¹²

Section 3: What associations must file and elect

A. The annual filing decision

An association files either Form 1120 or Form 1120-H for each tax year, and it makes the § 528 election by filing Form 1120-H; it must make a separate election every year.³ For a calendar-year association the return is due the 15th day of the fourth month after year-end (April 15 for a calendar year), and the association can take an automatic six-month extension by filing Form 7004 by the original due date, which extends the time to file but not the time to pay.¹⁴ An association that files no return remains a taxable corporation exposed to tax, penalties, and interest, and it forgoes the exempt-function exclusion that the § 528 election provides. If the association misses the election, the automatic 12-month relief under Treas. Reg. § 301.9100-2 described in the Form 1120-H instructions may allow a late § 528 election if the association takes corrective action in time.²

B. Classifying income

Exempt-function income is member dues, fees, and assessments the association receives from owners in their capacity as owners; non-exempt income is nearly everything else.⁴ Interest on operating and reserve accounts is non-exempt and taxable on either return, a point boards frequently miss.⁴ Cell tower and antenna leases, easement and access payments, nonmember facility rentals, and laundry and vending revenue generally count as non-exempt income, though the classification is fact-dependent and turns on who pays and in what capacity.⁴ On either return the association must keep records that separate exempt from non-exempt income and allocate directly connected expenses, because it may deduct only expenses connected to producing non-exempt income against that income.¹

C. Board and membership actions that must actually occur

A Rev. Rul. 70-604 carryover or refund requires a documented membership vote, recorded in the minutes, and applies to the Form 1120 path.¹¹ Characterizing capital improvement assessments as contributions to capital under Rev. Ruls. 75-370 and 75-371 requires the association to earmark the assessment for the specific capital purpose and segregate it from operating funds.¹² Segregating reserve funds supports capital-contribution treatment for qualifying assessments and helps document income classification, but it does not by itself make reserve interest untaxed; interest remains non-exempt income.⁴ The association should retain the records that support the return and the elections it claims.

D. Adjacent obligations

State income and franchise tax filings are separate from the federal return, and some states do not follow the federal § 528 election, a point the state Budget Approval column develops.⁶ An association that pays a contractor or other nonemployee for services may have to file information returns; Section 70433 of the One Big Beautiful Bill Act (P.L. 119-21, enacted July 4, 2025) amended IRC §§ 6041(a) and 6041A(a)(2) to raise the Form 1099-NEC reporting threshold from $600 to $2,000 for payments made after December 31, 2025, with inflation indexing beginning in 2027.¹⁵ An association with employees carries employment tax duties; HOA Weekly's coverage of associations as employers is in development. Because classification and eligibility are fact-dependent, associations should confirm their filings with a CPA experienced with association returns. This section states obligations and is not tax-planning advice.

Section 4: Recent guidance, rulings, and legislative activity

A. Recent IRS guidance and form changes

B. Recent decisions

C. Legislation and active debates

The One, Big Beautiful Bill Act (Public Law 119-21), enacted July 4, 2025, made the flat 21 percent corporate rate permanent, which keeps the Form 1120 rate stable for associations that do not elect under § 528.¹⁸ No bill in the 119th Congress located on congress.gov specifically amends IRC § 528 or the § 277 treatment of associations; measures such as H.R. 3475 address homebuyer and construction credits rather than association returns.¹⁹

Section 5: Interaction with state law and related coverage

The federal return is only part of an association's filing obligation. State income and franchise tax rules vary, and some states do not follow the federal § 528 election, so an association that files Form 1120-H federally may face a different computation or a separate election at the state level. State law also drives what the association must disclose to its members about its finances, a distinct obligation from the tax return that appears in the Budget Approval, Reserve Studies, and Records Inspection columns of the state matrix. Readers deciding how to handle a given year's return should read those state columns alongside the sibling federal pages on entity reporting and lender standards, then confirm the treatment with a CPA experienced with association returns.

HOA Weekly's federal taxation coverage updates quarterly as the IRS issues guidance and revises Form 1120-H and as Congress acts on the corporate rate. State financial disclosure and budget obligations, which sit apart from the federal return, appear in the Budget Approval, Reserve Studies, and Records Inspection columns of the state matrix.

Footnotes

1. 26 U.S.C. § 528, Certain homeowners associations (Office of the Law Revision Counsel, uscode.house.gov) ↩
2. Instructions for Form 1120-H (2025), U.S. Income Tax Return for Homeowners Associations (IRS) ↩
3. 26 C.F.R. § 1.528-8, Election to be treated as a homeowners association (eCFR) ↩
4. 26 C.F.R. § 1.528-9, Exempt function income (eCFR) ↩
5. IRS, IRC Section 501(c)(4): Homeowners' associations (citing Rev. Rul. 74-99, 1974-1 C.B. 131) (IRS) ↩
6. IRS, IRC Section 501(c)(4): Homeowners' associations (IRS) ↩
7. 26 C.F.R. § 1.528-4, Substantiality test (eCFR) ↩
8. 26 U.S.C. § 11, Tax imposed (Office of the Law Revision Counsel, uscode.house.gov) ↩
9. 26 U.S.C. § 277, Deductions incurred by certain membership organizations in transactions with members (Office of the Law Revision Counsel, uscode.house.gov) ↩
10. Rev. Rul. 2003-73, 2003-28 I.R.B. (IRS) ↩
11. Rev. Rul. 70-604 (excess assessments applied to following year or refunded); IRS position on single-year carryover discussed in Internal Revenue Bulletin materials (IRS) ↩
12. Rev. Rul. 75-370 and Rev. Rul. 75-371, 1975-2 C.B. (capital improvement assessments as contributions to capital under IRC § 118), as discussed in IRS guidance (IRS) ↩
13. IRS, Social and Recreational Clubs — IRC Section 501(c)(7) (Audit Technique Guide) (IRS) ↩
14. Instructions for Form 7004 (12/2025) (automatic extension of time to file; homeowners association filing Form 1120-H) (IRS) ↩
15. IRS, Am I required to file a Form 1099 or other information return? (reporting threshold $2,000 for payments made in 2026 under the One Big Beautiful Bill Act) (IRS) ↩
16. T.D. 9989, 89 FR 17606 (Mar. 11, 2024) (Federal Register); see also T.D. 9972, 88 FR 11754 (Feb. 23, 2023); Instructions for Form 1120-H (2025) (IRS) ↩
17. Mira Vista Homeowners Association, Inc. v. Commissioner, T.C. Memo. 2025-102, Docket No. 14901-22X (U.S. Tax Court, DAWSON, filed Oct. 6, 2025) ↩
18. One, Big Beautiful Bill Act, Pub. L. 119-21 (2025); 26 U.S.C. § 11 (21 percent corporate rate) (Office of the Law Revision Counsel, uscode.house.gov) ↩
19. H.R. 3475, Bipartisan American Homeownership Opportunity Act of 2025, 119th Congress (Congress.gov) ↩