Tax liability

Understanding Tax Liability for Homeowner Associations

Tax liability is a term that refers to the legal obligation of an individual, corporation, or organization to pay taxes to a federal, state, or local government. For a Homeowner Association (HOA), their tax liability can be complex due to the unique nature of these organizations.

Typically, an HOA is a non-profit organization; however, that does not mean they are exempt from all taxes. The Internal Revenue Service (IRS) treats HOAs as corporations for tax purposes. This means they are subject to federal corporate income taxes on their non-exempt income, which includes any income generated from non-members or from members for the use of amenities that are not considered essential property functions.

However, an HOA can file Form 1120-H to take advantage of certain tax benefits. This form allows the HOA to exclude exempt function income (such as membership dues, fees, or assessments) from their taxable income. Yet, any income from non-exempt functions (such as renting the common area for parties) would be taxable. The tax rate for HOAs filing Form 1120-H is a flat 30% for federal tax purposes.

To mitigate their tax liability, HOAs should keep accurate records of their income and expenses and separate their funds accordingly. It is also recommended to work with a tax professional who understands the intricacies of HOA tax obligations.