It can often be challenging to navigate through the requirements for HOAs and filing tax returns for them. This situation can get even more complex when the rules of individual states are involved. Some states, like Texas, may require a specific form for exemption from franchise tax. Others may automatically extend a federal exemption (see Oregon HOA Tax Return Filing Requirements). This post will explore the requirements for filing a Texas HOA tax return.
Qualifying and filing as an exempt organization at the federal level
Under Section 528 of the Internal Revenue Code (IRC), Homeowners associations can file as tax-exempt organizations. As long as almost all of the association’s income is received from assessments and used for maintaining its properties, it may qualify under IRC § 528. Specifically, HOAs must:
- Use a minimum of 85% of their units as residences.
- Receive at 60% or more of their income from homeowners in their capacity as HOA members.
- Establish at least 90% of the association’s expenses as used for capital and operating costs directly related to the exempt function of the organization.
- Not use any residual income to benefit HOA members.
Another option for HOA tax return filing is to file as a C-Corporation (NOT an S-Corporation). However, tax-exempt status is usually ideal for homeowners associations, so long as they qualify under the above criteria. These HOAs must file Form 1120-H with the IRS annually.
Texas HOA tax return filing requirements
Now that we have discussed the federal requirements for HOA filing, we can review the complexities surrounding the Texas HOA tax return filing requirements. Any homeowners associations that are federally tax-exempt under IRC Sections 501(c)(2), (3), (4), (5), (6), (7), (8), (10), (16), (19), or (25) are eligible for exemption from the Texas Franchise Tax. Therefore, any HOAs that qualify for federal exempt status under IRC § 528 may not necessarily qualify in the state of Texas. The association must meet the following criteria to be eligible for a TX exemption:
- Be a nonprofit corporation organized primarily to manage and maintain residential properties or real estate developments.
- Not be used for any commercial activity.
- Have homeowners as members of the association hold at least 51% of voting control.
Any homeowners associations that meet these requirements or qualify under one of the above-listed IRC Sections must file Form AP-206, Texas Application for Exemption – Homeowners Associations. Qualifying HOAs will then receive approval for the tax exemption by the Texas Comptroller’s office. HOAs are otherwise subject to the Texas Franchise Tax, like any other corporation.
The IRS allows tax-exempt status for qualifying homeowners associations under the IRC § 528. Texas has its unique state requirements for HOA tax return filing. To be exempt from the state franchise tax, associations in Texas must qualify as nonprofit corporations under certain IRC Sections or meet the specified criteria listed above. These organizations should file for an exemption with both the federal and state governments. There can be many complexities associated with filing HOA tax returns. Make sure you employ an experienced tax professional well-versed in the taxation of HOAs and the challenges associated with filing a Texas HOA tax return.
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