Homeowners’ Associations Tax Basics

Posted on Wednesday, February 24, 2016

Federal Reporting

For federal purposes, homeowners’ associations are treated as corporations.  In rare instances a homeowners’ association may apply for tax exempt status under 501(c)(4) social welfare organizations or 501(c)(7) social and recreational clubs.  In order to receive this exemption, Form 1024 Application for Recognition of Exemption Under Section 501(a) must be filed with a required filing fee.  It is not usually beneficial for a homeowners’ association to file for exempt status because of the extra filing fees and because the association can file Form 1120-H U.S. Income Tax Return for Homeowners Associations.

Since homeowners’ associations are corporations, they must file a corporate tax return (Form 1120 U.S. Corporate Income Tax Return); however, they may choose to file Form 1120-H instead.  A disadvantage of filing form 1120 is that all of a homeowners’ association’s income is taxed, and it may be subject to estimated tax payments.  Form 1120-H is a shorter, one page form and only non-exempt income is taxed.  In order to file Form 1120-H, 60% of the homeowners’ association’s income must be exempt function income.  Exempt function income includes membership dues, assessments, fees, and interest on those fees.  Also 90% of the homeowners’ association’s expenses must be for management, maintenance, acquisition, and construction of association property.  If the homeowners’ association qualifies to file Form 1120-H, only its non-exempt income is taxable.  Non-exempt income includes interest and dividends, rental income from property owned by the association and other revenue not included in the definition of exempt function income.  Expenses directly related to the generation of non-exempt income are allowed to be deducted from non-exempt income on the return. 

In order to file Form 1120-H, an election must be made each year by the homeowners’ association.  This is done by filing Form 1120-H by the 15th day of the third month after the association’s tax year (March 15th for December year ends). 

Indiana Reporting

In the State of Indiana, homeowners’ associations are recognized as a specific kind of nonprofit corporation.  Indiana law permits three types of nonprofit corporations (1) public benefit corporations, (2) mutual benefit corporations or (3) religious corporations.  Homeowners’ associations are specifically included as a mutual benefit corporation.  Unlike federal purposes, which require homeowners’ associations to be recognized as a corporation, a homeowner’s association organized in Indiana would identify itself as a nonprofit corporation (mutual benefit) in its articles of incorporation.  Although a homeowners’ association is recognized as a nonprofit in its articles of incorporation, not exempt from Indiana corporate tax and, therefore, must file Form IT-20 Indiana Corporate Adjusted Gross Income Tax Return with the state of Indiana by the 15th day of the 4th month following the close of the association’s tax year (April 15th for December year ends).

Posted by: Carrie Minnich, CPA

Posted in Mission Minded Nonprofits

Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.

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