There can be a lot of confusion around HOAs and tax returns. While you may think that you do not have to file a tax return as an HOA because you are technically a nonprofit entity, the truth is that the government views HOAs as corporations. As a corporation, you must file a tax return every year. Fortunately, as an HOA most of the income reported on your taxes will be exempt from taxes. We understand how the tax laws apply to HOAs and which income is exempt.
According to the IRS website, exempt function income includes membership fees, dues, or assessments from
- Owners of timeshares when the purpose of the funds are to use or pay for their interest in the timeshare property
- Owners of condos
- Owners of real property where the HOA is a real estate management association
It is important to note that this income has to come from members as owners of the properties, not as customers of the HOA’s services. Generally speaking, any income earned as a result of running the HOA is taxable. This can include fees generated from allowing access to residential services and programs such as a swimming pool, fitness center or clubhouse rentals. Additionally, any interest or dividends generated as a result of investing the HOAs money will count as income.
While HOAs may earn nonexempt income from various services, those profits will see a higher rate than corporate profits. The current tax rate for any profit generated by an HOA is 30%. More information about this topic is available on our web page about real estate law.