Tax Treatment of Homeowner and Condominium Associations
Homeowner and condominium associations are essential for managing residential properties, upholding the communities’ by-laws, and of course, collecting resident dues in order to fund operations. Timeshare associations also fulfill this function. However, many of us who reside in communities with such associations may be unaware of the related tax compliance requirements that come with the privilege. This is especially true for smaller homeowner or condominium associations which may only consist of two units. In order to qualify as a homeowners association, at least 60% of the association’s gross income must consist of exempt function income. In addition, at least 90% of the association’s expenses must consist of expenses to acquire, build, manage, maintain or care for the association’s property. Note that no individual or private shareholder can profit from the association’s net earnings other than through profits achieved by the association in acquiring, building or management of the property.
An association can file as a C corporation on Form 1120, or it can elect to file on Form 1120-H and utilize the tax benefits provided by Internal Revenue Code Section 528. The tax benefits include excluding members’ dues, assessments and fees from income. The election is made separately for each year. Once Form 1120-H is filed, the association cannot revoke its election unless the IRS consents.
Another benefit of taking the Section 528 election and filing Form 1120-H is the return’s simplicity, as it is a simple, one-page form that does not require a balance sheet. In addition, quarterly tax estimates are not required for Form 1120-H. A key benefit of making this election is that exempt function income is not subject to tax. Exempt function income includes membership dues, fees or assessments from the owners of the condominium units, owners of real property, and the owners of timeshare interests. Payments from non-members and interest on amounts in a sinking fund are not included. In addition, payments from members for special use of the organization’s facilities are not included in the definition of exempt function income.
Income other than exempt function income is taxed at a 30% flat rate (32% for timeshare associations). A $100 exemption is allowed. Note that there is no AMT (alternative minimum tax), and NOL deductions (net operating losses) are not allowed. The return (Form 1120-H or Form 1120) is now due April 15, a change from prior years due to the recent adjustments in federal return due dates. Note that an association with a fiscal year ending on June 30 must file by the 15th day of the third month after the end of its fiscal year.
Your home state may also have a corresponding form. The filing date for Form 1120-H or Form 1120 can be extended on Form 7004 for an additional five months.
If you have questions related to the requirement for these forms, please contact your Marcum tax advisor or the author of this article.