Homeowners Associations

1) Elect to file Form 1120-H as a homeowners association.
2) File Form 1120 as a regular C corporation.

Very few homeowners associations can qualify as exempt organizations under IRC §501(c). Most homeowners associations file Form 1120-H.

—Advantages Of Filing Form 1120-H:
• Simple one-page form to prepare.
• No balance sheet to prepare.
• Net "exempt function" income is not subject to tax.
• Not required to pay estimated tax payments.
• A specific deduction of $100 is allowed.

—Disadvantages Of Filing Form 1120-H:
• Any taxable income is taxed at a flat 30% homeowners association rate instead of the 15%, 25%, 34%, and 35% corporate rates.
• Expenditure allocation requirements are more stringent than when filing Form 1120.
• Not entitled to a net operating loss deduction.
• Not entitled to certain special deductions available to regular corporations.

—Qualifications For Filing Form 1120-H:
• Homeowners association tax return must be timely filed, including extensions.
• At least 60% of the homeowners associations’s gross income for the tax year must consist of "exempt function income," such as membership fees (see definition below). Tax-exempt income is not considered exempt function income for purposes of the 60% test.
• At least 90% of the homeowners associations expenses must be for the acquisition, construction, management, maintenance and care of homeowners association property.
• Earnings from the homeowners association cannot be used for the specific benefit of any member or individual.
• The homeowners association cannot be a cooperative housing association.

Homeowners Association Filing Deadline: Form 1120-H is due on the 15th day of the 3rd month after the end of the tax year. To request a 6-month extension, file Form 7004 , Application For Automatic Extension Of Time To File Corporation Income Tax Return.

Homeowners Association Exempt Function Income: Exempt function income is defined as all membership dues, fees, and assessments including interest charged to homeowners association members on delinquent assessments. These are fees generally charged to pay for the maintenance and management of the homeowners association property. Owners of the individual residential units are considered "members" in the case of a condominium management association. Owners of residences or residential lots are considered "members" in the case of a residential real estate management homeowners association. By filing Form 1120-H, the net exempt function income (after deducting certain allocable expenses) is not taxed.

• Income that is not considered exempt function income and therefore taxable at a flat 30% rate includes:
– Money received for the use of the facilities at the election of the user (such as party room rentals).
– Interest and dividends from investments.
– Coin laundry and vending machine income.
– Rental of units owned by the homeowners association.
– Rental of garage parking and storage areas.

• For purposes of the 90% qualifying expenditure test, the following expenses are included:
– Manager and secretarial salaries.
– Paving and street signs.
– Legal and accounting fees.
– Insurance.
– Maintenance of pools, recreation halls, tennis courts, etc.
– Replacement of facilities, air conditioning, etc.

Homeowners Association Homeowners association expenses must be allocated between exempt function income and nonexempt function income. The homeowners association should have written documentation to prove how expenses are allocated. 

Timeshare Associations: The only difference between time-share associations and homeowners associations is that qualifying timeshare associations are taxed at a flat 32% rate on timeshare association income. Homeowners associations are taxed at a flat 30% rate.