HOA Taxes: Understanding the basics

The importance of understanding taxes in your HOA

Taxes are a part of life for individuals and businesses alike. If you're a board member for your community's homeowners’ association (HOA), you may be surprised to learn that the IRS treats your HOA much like a business. This means that, just like corporations and nonprofits, your HOA has tax responsibilities that need to be met each year. And while these aren’t the same as your personal taxes, understanding how they work is important for keeping your association in good standing.

In this article, we’ll cover the essentials to help you be confidently informed about your HOA’s tax obligations. We’ll explore what HOA taxes are, when they need to be filed, key deadlines, and tips for managing them smoothly. Whether it’s your first time dealing with taxes or you’re looking to refresh your understanding, we’re here to help simplify the process.
 

What are HOA taxes?

HOA taxes refer to the taxes specific to the association itself and must be paid to the government, the same as any other taxes a business or company would have to file.

After this form is filed, the association gathers certain tax benefits, which can allow the HOA to exclude function income from its gross income. An exempt function income can typically include income generated from paid fees, dues, and any assessments from homeowners, especially if they were used to maintain the common areas and other services that all residents can benefit from. With this, associations can help reduce their tax liability.

There are many complexities within this process, especially when determining if your HOA needs to file tax forms in the first place. The short answer is yes, although the process looks different depending on your association.

Even if your association is required to file, it doesn’t necessarily mean you’ll owe taxes. Most HOA income is considered exempt and won’t be taxed if the HOA qualifies— but the IRS still expects an HOA to file a tax return each year.
 

How can you know when taxes are due?

There are many ways to search when your HOA taxes are due. These can include:

• Speak with a tax professional
   
• Visit the IRS website for deadlines and forms
   
• Review your association’s governing documents
   
• Consult with your management company

Typically, these dates can change throughout the years. However, if your HOA has a calendar year-end, you can take place during mid-April. If your association has a fiscal year-end of June 30, this deadline could take place sometime in September.  

It’s crucial that you take the steps to inform yourself and the rest of your board regarding taxes, and especially their deadlines, to help prevent any legal challenges.
 

Do HOAs have specific tax forms?

Yes, you should refer to a trusted professional in the industry for clarification depending on your specific HOA, but most HOAs have to file using Form 1120 or 1120-H to report the income and expenses within.

The two types of forms differ, but associations have the flexibility to choose which form to use every year. You can decide to switch between these as you see fit as the years pass. However, it is noted that the traditional Form 1120 tends not to be preferred due to:

• Length
   
• Detailed information needed
   
• More careful review needed from HOA treasurer
   
• As they manage estimated tax payments as well
   
• Makes any unused yearly funds taxable

Since it is designed specifically for HOAs, Form 1120-H is found to be simpler when filing— as it contains less fields to complete. Also, please be advised that Form 1120-H imposes a 30% tax on all profits, whereas Form 1120 typically has tax rates starting at 15% for the first $50,000 in income.

During this filing process, we recommend your association treasurer to review that all records and financial statements are present since they will be needed when completing the form. During filing, keep these common mistakes to avoid in mind:

• Misclassifying income or expenses
   
• Failing to report all sources of income
   
• Neglecting to document deductions properly
   
• Non-compliance with state or local tax requirements

Are HOAs non-profit?

Although they can be seen as non-profit since all board members are volunteers and it is a governing structure that only uses funds for the benefit of the community, almost every federal government identifies HOAs as corporations.

But in some cases, the IRS can recognize an HOA as a nonprofit, and then there would be different routes needed when referring to their taxes, as they will have to file different forms approved for registered non-profits.
 

Are HOAs tax exempt?

HOAs are generally not tax-exempt. Because they are mostly seen as corporations, they must file their tax returns and pay taxes on their income.

However, if you decide to file for a Form 1120-H, you must know that it is governed under IRC Section 528, which states that HOAs that qualify do not pay tax on profits from the exempt activities (income directly related to the HOA, such as membership dues and association fees) unless they have non-exempt activities (income from non-ordinary services, like fees from facilities or interest)— in this case, HOAs will pay tax on the net profit from non-exempt activities.

To qualify under this section, HOAs must meet the following criteria:

• At least 60% of the HOAs gross income must come from exempt function income
   
• At least of 90% of expenditures must go toward property maintenance and upkeep
   
• No private shareholder can profit from the HOAs earnings unless through property-related activities or rebates of excess dues/fees

What if an HOA doesn’t file taxes?

Missing HOA tax filing can potentially bring legal and/or financial consequences. It’s crucial your association gets in touch with a tax professional who can provide more guidance. However, you may be able to address missed filings, which can help prevent penalties and maintain the HOA’s standing.
But with the many complexities of your job as a board member, we understand if more assistance is needed. If you need a form extension, you can do so by contacting the IRS and asking for more time to complete your forms as long as it applies within the deadline for tax filing.

If you complete Form 7004 before the tax return date, your association can benefit from six additional months for filing.
 

Your HOA’s financial health

We understand that navigating taxes for your HOA can feel complex, but understanding these basics and staying informed can make a big difference for your community. By reviewing your HOA meets its tax responsibilities, you’re helping protect the association’s financial health and legal standing.
With a proactive approach and the right resources, managing HOA taxes doesn’t have to be daunting—it's one more way you contribute to a well-run, financially secure community.

If you are looking for more ways to optimize your community’s financial health, FirstService Financial specializes in financial services designed exclusively for HOAs. From securing competitive loan options, guidance on budgets and reserves, to providing insurance coverage expertise and more— they help your board make decisions that benefit your association’s long-term financial health.
For more information about best-in-class expertise in financial services, visit FirstService Financial.

To learn how FirstService Residential can support your community's vision, contact a member of our team.