Quick Answer
Most HOAs are not automatically tax-exempt. They are generally taxed as corporations but can choose how. Many file Form 1120-H under IRC Section 528, which excludes exempt function income, such as member assessments, and taxes only the remainder. Others file Form 1120, and a few qualify under Section 501(c)(4). Your association's CPA should choose the best option each year.
Are HOAs Tax-Exempt?
Being a nonprofit under state law is not the same as being tax-exempt with the IRS. A community association usually has three federal paths: file Form 1120-H, file Form 1120, or, if it qualifies, hold exempt status under Section 501(c)(4). The IRS instructions say an association that is tax exempt under section 501(a) does not file Form 1120-H.
Section 501(c)(4) status is the hardest to get. In IRS determination letters, the IRS has applied Revenue Ruling 74-99 tests: the association serves a recognizable community, does not handle exterior maintenance of private residences, and has common areas open to the public. Those letters are not binding precedent, so treat this as a general guide. Most associations whose amenities are limited to owners rely on Form 1120-H or Form 1120.
Form 1120-H vs Form 1120
Under the IRS Form 1120-H instructions, an association elects Section 528 treatment simply by filing a properly completed Form 1120-H. The election is made separately for each tax year, and the instructions say an association should compare its tax on each form and may file the one that results in the lowest tax.
| Feature | Form 1120-H (Section 528) | Form 1120 |
|---|---|---|
| Election | Made each year by filing the form | Default return if no election |
| Member assessments | Excluded as exempt function income | Generally part of gross income unless your CPA supports another approach |
| Tax rate | Flat 30% on taxable income for condominium and residential associations (per 2023 instructions) | Regular corporate rules apply |
| Deductions | Only those directly connected to non-exempt income, plus a $100 specific deduction | Ordinary business deductions |
| Estimated tax | Not required for associations electing 1120-H | May be required |
The 60% and 90% Tests Under Section 528
To qualify as a homeowners association for Section 528, the IRS instructions list these requirements:
- 60% gross income test: at least 60% of gross income for the year must be exempt function income.
- 90% expenditure test: at least 90% of expenditures must be to acquire, build, manage, maintain and care for association property. Current and capital expenditures count.
- No private benefit: no individual may profit from net earnings except through association property or rebates of excess assessments.
- Election: the association must file Form 1120-H.
The instructions also state that transfers to a sinking fund for future costs, such as a roof replacement, are not counted as expenditures for the 90% test. That matters for associations that fund reserves aggressively. See how HOA reserve funds work.
What Is Exempt Function Income?
Exempt function income is dues, fees or assessments paid by owners as members, not as customers. Assessments to maintain association property generally qualify. Per the instructions, the following are not exempt function income:
- Payments from nonmembers
- Member payments for special use of facilities beyond what is generally available to all members
- Interest on amounts in a sinking fund
- Payments for work done on non-association property
Interest earned on reserve accounts is therefore commonly the taxable income on a Form 1120-H return.
Deadlines and Practical Tips
- Form 1120-H is generally due the 15th day of the 4th month after year-end, so April 15 for a calendar-year association, with a later due date if it falls on a weekend or holiday.
- Form 7004 requests an extension of time to file, but not time to pay.
- The return must be signed by an authorized officer, such as the president or treasurer.
- Late-filing penalties can apply, and a late filer may lose the right to elect Form 1120-H for that year.
- State income or franchise tax filing rules differ in Michigan, California and elsewhere, so confirm them with your CPA.
Budget for tax preparation as part of HOA financial management and the annual budget process.
Frequently Asked Questions
Does an HOA have to file a federal tax return?
Generally yes, unless it holds recognized exempt status that carries no filing duty. Even associations with little taxable income typically file Form 1120-H or Form 1120. Ask your CPA.
Can an HOA switch between Form 1120 and Form 1120-H?
The Section 528 election is made year by year, so an association can generally compare both each year. Once Form 1120-H is filed, it cannot be revoked for that year without IRS consent.
What happens if the HOA fails the 60% or 90% test?
It cannot use Section 528 for that year and would file Form 1120 instead. Non-member income or heavy reserve transfers can cause this, so review the numbers before year-end.
Are HOA assessments taxable income?
Under Form 1120-H, member assessments are exempt function income and are excluded. Under Form 1120, treatment depends on the approach your CPA supports.
Who signs the HOA tax return?
An authorized officer signs. A paid preparer must also sign and complete the preparer section.
How APM Helps
APM manages community associations in Michigan and California and works alongside each board's CPA on budgeting, reporting and year-end documents. Learn about our association management services, review pricing, or request a free proposal.
This article is general information, not legal, tax or accounting advice. Laws and documents vary by community; ask your association's attorney or CPA about your situation. Last verified October 25, 2026.
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