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Tax Exempt Homeowners Associations

If you're the owner of a condominium or time-share used as a residence, you're probably a member of a Homeowners Association. But, just what is a Homeowners Association? And, is a Homeowners Association exempt from federal income tax?

According to federal tax law (see Internal Revenue Code §528), a Homeowners Association means "an organization which is a condominium management association, a residential real estate management association, or a timeshare association" if:

    1.   It is organized and operated to provide for the acquisition, construction, management, maintenance, and care of association property;

    2.   60% or more of the association's gross income for a tax year consists solely of owner's membership dues, fees, or assessments;

    3.   90% or more of its expenditures in a tax year must be to acquire, construct, manage, maintain and care for association property and, in the case of timeshares, to provide for activities of association members.

    4.   No part of the association's net earnings may inure to the benefit of any private shareholder or individual.

Yes, a Homeowners Association will be tax-exempt if it properly organizes a nonprofit corporation under state law and adopts bylaws fairly setting forth the right, powers, and privileges of homeowner's, and makes a timely election under Internal Revenue Code §528. It must also file tax return Form 1120-H.

This is only a brief outline of how the Internal Revenue Code and Regulations define a Homeowners Association. The documentation is fairly complex and involves considerable detail. If you want to incorporate and organize a Homeowners Association as a tax-exempt organization, please contact us.

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