Owning a home in the state of Vermont you may be part of an HOA (Homeowners Association). This organization is put in place to governed your shared spaces and maintain the community.
Your HOA must comply with federal and state law in regards to taxes. HOAs must file Articles of Incorporation in with the Vermont Secretary of State, and will be treated as a corporation. In some rare cases HOAs may be able to file for non-profit status but they will still be required to file the applicable tax forms for the annual tax return.
Vermont HOA & Condo Association Tax Returns
Vermont laws permit HOAs and COAs either using Form 1120 or Form 1120-H. Filing Form 1120-H has proven to be more advantageous to HOAs because it was specifically designed for Homeowner’s Associations and is much easier to complete. To qualify for Form 1120-H HOAs must pass the following tests:
- Exempt Purpose Test – 85% of all the association’s units, lots or buildings are used by individuals as a residence.
- Exempt Function Income Test – 60% or more of the association’s annual gross income must be from membership dues, fees or assessments.
- Exempt Function Expense Test – 90% or more of the association’s expenditure for a tax year must be exempt function expense (to acquire, construct, manage, maintain and care for association’s property).
- No Private Benefit Test – The profits of the association cannot be allocated to benefit any person(s) who have a personal interest in the association.
Lastly, HOAs must elect to apply IRC Section 528 for that tax year – HOA makes this election every year. The form should be filed by the due date, the 15th day of the fourth month following the close of the HOA’s tax year.
If a homeowner association qualifies to file Form 1120-H then they will only be taxed on the non-exempt income they received. This non-exempt income includes items such s interest, dividends, and other for-profit activities such as rental of the facilities. Expenses that are used to solely generate non-exempt income are then deducted. HOAs are allowed a $100 deduction on taxable income.
While Form 1120-H is typically more attractive to HOAs and COAs there some aspects for the Form 1120 are appealing. Filing Form 1120 permits for a lower tax rate of 15% on the first $50,000 of income compared to the 30% for Form 1120-H. Overall, most associations find themselves filing very minimal taxes under Form 1120-H.