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Guidance -- Tax

Residential homeowners associations (HOAs) may elect to be taxed either under IRC Section 277, which applies to certain membership organizations, or under IRC Section 528, which applies specifically to "exempt" homeowners associations as that term is defined for tax purposes. HOAs that that are taxed under IRC Section 277 file the standard form 1120 (or 1120-A). Qualified HOAs that elect to be taxed under Section 528 file form 1120-H, U.S. Income Tax Return for Homeowners Associations.

If an HOA elects to be taxed under IRC Section 528, it must allocate its income and expenses between its exempt function activities and its activities for the production of gross income (or nonexempt function activities). The HOA is not taxed on its exempt function activities but is taxed at the rate of 30% on its net nonexempt function income.

Similarly, under IRC Section 277, a HOA must allocate its income and expenses between membership and non-membership activities, and, by making certain tax elections, only its net non-membership income will taxed at regular corporate tax rates (15% for most HOAs). While exempt function and membership activities are similar in some respects (both are also similar to the concept of unrelated business income of nonprofit organizations), there are some important differences.

Thus, by utilizing Section 277 and filing Form 1120, an HOA can reduce its income tax liability by 50 percent compared to filing as an exempt homeowners association using Form 1120-H.  However, specific actions must be taken and the records of the association must be maintained a certain way. Otherwise, the association could be audited by the IRS and could be  subject to additional taxes, interest and penalties. In order to assess whether an association is a good candidate for using Form 1120, click the menu Form 1120 Checklist.


Links to forms of the two alternative filing options and resolution template used to avoid paying unnecessary taxes in certain cases:

1120H.pdf

1120.pdf

70-604-Resolution.pdf