HOA tax law may not be as simple as you might think. But each HOA or condo association must also consider Virginia tax law as well. Both areas are often overlooked as many associations (and even some tax professionals) assume that community associations are “non-profits” with no requirement to file tax returns.
With over 300,000 HOAs and community associations in the United States, they all are required to file tax returns at the federal level. But the state requirements is where the challenge usually exists. Virginia is home to thousands of condo associations that are each required to navigate the filing requirements.
Virginia HOA & Condo Association Filing Requirements
Fortunately, many of the larger condo associations are managed by professional community managers. These managers have a fiduciary obligation to the associations they managed. Along with the responsibility comes the need to make sure that basic filing requirements are understood and an HOA CPA is engaged in the process.
But there are many self-managed HOAs in Virginia. Under this scenario, the association members will typically elect board members who will serve as managers for the association. But this is often a sign of trouble to come. Managing the overall operations will take up a significant amount of time and the tax issues and filing requirements are often not addressed.
Virginia HOA and Condo Associations Have Filing Options
But there is some good news. Most HOAs don’t owe any income tax, even though they have a filing requirement.
If an HOA unfiled, late or delinquent tax returns it may not be such a bad situation. I have actually worked with HOAs and condo associations that have not filed tax returns in decades. This is definitely not an ideal situation, but a solvable situation.
HOAs have a unique filing situation. Associations have the ability to choose how they want to file on an annual basis. In fact, they can switch back and forth. They can file Form 1120 or Form 1120-H.
But if they choose to file Form 1120-H they must qualify under IRC section 528. But for most associations this is not that difficult. The numbers suggest that over 70% of associations file Form 1120-H each year.
The tax terminology can be confusing for HOA board members to understand. For example, section 528 allows associations to avoid paying tax on income defined as “exempt functional income.” This is income and fees received from members as a result of dues and assessments. Typically this income is to cover expenses for the the general upkeep, maintenance and association management.
Even though assessments and dues are exempt income, fees that are collected when a member (or even a non-member) is acting as a customer would be not exempt from tax. The association can deduct any direct expenses and any net income is subject to taxation.
Because the taxable rate can be 30%, many communities will choose to file Form 1120. This form does not segregate exempt or non-exempt income and it subjects any HOA profit to taxation. But based on your circumstances, this may be the best option and your CPA or tax professional can both scenarios to see which is best.
Virginia HOA and Condo Tax Questions?
Just make sure that you file on a timely basis. Late penalties are 5% on a monthly basis (with a maximum of 25%). But you also must add penalties for late payment and interest. Non-filing is not the position any HOA wants to be in.
At the end of the day, HOAs and condo associations must file annual tax returns. However, the process is not as difficult as you may think.
A qualified CPA with a specialty HOA returns will be a tremendous help. He or she can go a long way to helping you stay compliant and keeping your distance from the IRS.
We serve the following HOAs and condo association in Virginia:
Virginia Beach, Norfolk, Chesapeake, Richmond, Arlington, Newport News, Alexandria, Hampton, Roanoke, Portsmouth, Suffolk, Lynchburg, Dale City, Centreville, Reston, Harrisonburg, Leesburg, Ashburn, McLean, Charlottesville, Tuckahoe, Lake Ridge, Blacksburg, Annandale, Burke, Manassas, Danville, Linton Hall, Marumsco, Mechanicsville, Oakton, Fair Oaks, Petersburg, Springfield, Sterling, South Riding, West Falls Church, Fredericksburg, Winchester, Short Pump, Salem, Cave Spring, Lincolnia, Bailey’s Crossroads, Herndon, Staunton, Chantilly, Fairfax, West Springfield, Tysons Corner, Hopewell, Chester, Woodlawn, Waynesboro, Christiansburg, McNair, Rose Hill, Lorton, Franconia, Montclair, Franklin Farm, Idylwood, Meadowbrook, Culpeper, Burke Centre, Colonial Heights, Cherry Hill, Radford, Buckhall, Sudley, Fort Hunt, Brambleton, Neabsco, Merrifield, Bon Air, Bristol, Laurel, Wolf Trap, Manassas Park, Vienna, Glen Allen, Highland Springs, Groveton, Hybla Valley, Great Falls, Kingstowne, Bull Run, Front Royal, Williamsburg, East Highland Park, Falls Church, Hollins, Gainesville, Kings Park West, Broadlands, Brandermill, Newington, Martinsville, Timberlake, Huntington, Lakeside