Board members often ask the question – do homeowner associations have to file tax returns? There is a lot of confusion regarding the issue. Let’s try to clear it up.
Often they are called “tax-exempt” or “non-profit”. But is this really true and what does it mean? This argument has been around for decades and it is simply false. Homeowner associations do have to file tax returns. The same is true for condo associations.Fast Links
- Does an hoa have to file a tax return: Rules under Section 528
- So what do I file?
- Do homeowner associations have to file tax returns?
Homeowner associations are considered common interest realty associations (or “CIRAs”). They are required by law to file federal tax returns with the IRS. In addition, they are subject to laws at the state level. There are 7 states that do not have a state income tax. Many states though follow the federal standards in place under Section 528.
But don’t be too alarmed that a tax return is required. The homeowner association will probably owe little in tax (if any). The vast majority of the association’s revenue will likely be classified as exempt income. But they may have small amounts of other income, such as interest and dividends. These amounts could result in a tax liability.
So now that we have established that the homeowners association must file a tax return, what form do they file? Is it difficult to complete? What are the options?
The HOA has two filing options – Form 1120-H and Form 1120. Form 1120-H is relatively straightforward and simple to complete. But there are a few downsides and they need to make sure that they qualify before they can even file.
Does an hoa have to file a tax return: Rules under Section 528
When understanding HOA tax laws, the most critical issue is understanding section 528. This was specifically designed for homeowner associations and condo communities.
Section 528 spells out the criteria that needs to be met in order to file form 1120-H. There are several criteria, but the main two criteria are the 90% expense test and the 60% revenue test. Make sure that you review section 528 in detail so that you understand the rules and how they apply to your association.
Under section 528, membership fees are not taxable and you can also exclude assessment revenues because the funds are used for the maintenance and upkeep of the community property.
If the homeowner association rents out a clubhouse or has cell tower income then this will be taxable. However, you can offset this income with direct expenses that relate to the taxable revenues.
So what do I file?
At least there is some flexibility in what form to file. Assuming the homeowners association qualifies under Section 528, the association can file form 1120-H. Most entities will file form 1120-H as it has been designed homeowner associations. However, it may not result in the lowest tax liability.
So now I think you know the answer to – do homeowner associations have to file tax returns? But this is just the start. There are several rules and requirements. The good news is that most homeowner associations will qualify under section 528. With a little help from a CPA you can navigate the tax law. But don’t worry, if the association does not qualify under section 528 it can still file form 1120.
Do homeowner associations have to file tax returns?
I think you know the answer to this by now. The answer is a resounding YES. If you need some help here is a form 1120-H example.
But before you dive in, understand that each homeowner association is unique. The Board should review the activities of the homeowner association and discuss the situation with a CPA who understands how to file an HOA tax return.
Why Homeowners Associations have to file taxes:
- They are not “Tax-Exempt” Or “Non-Profit”
Many folks believe they are not subject to taxation. This is a common misconception. The reality is that they are taxed on non-exempt profit.
- The HOA will probably not have a tax liability
Even though a filing is required the association will probably not owe any tax. Even if the HOA has non-exempt income it is likely it will have expenses to offset.
- State law can vary
But just because the IRS requires a tax return does not mean that the state will require one. Each state is different. So make sure you do your research.
- Take a close look at both form 1120 and 1120-H
Remember that you have options. File the return that best meets the requirements of the association.
- Consult a professional
The returns may sound easy, but they have a few complexities. You will likely need a professional to help with your situation.
Make sure that your homeowner association does not fall behind on filing responsibilities. If it fails to file there could be substantial penalties and interest. Remember, there may not be any tax due. So get the returns filed and sleep easy at night.