Homeowners associations (HOAs) are non-profit organizations. However, being a non-profit organization does not make a homeowners association tax-exempt. Under federal tax laws, HOAs must file tax returns annually as any other registered corporation would. HOAs collect fees from community members and follow a business-like structure. However, there are various circumstances in which an HOA might qualify for tax exemptions. This guide explains different tax exemption options for HOAs.
Tax Exemption for HOA Communities
HOAs might be non-profit organizations, but this status does not automatically qualify them for tax exemptions. HOAs must file tax returns after every financial year. However, filing tax returns does not necessarily mean an HOA owes the IRS taxes.
Obtaining tax exemption for HOA communities can be challenging, but it is not impossible. Your association must meet various Internal Revenue Code requirements to qualify for tax exemption. Here are three types of exemptions available to HOAs:
IRC Section 501(c)(4)
Registering your community as a social welfare organization under Section 501(c)(4) of the Internal Revenue Code can make your homeowners association tax-exempt. However, this HOA tax exemption option is the strictest as it has stringent requirements. Your association must demonstrate that its functions are for the benefit and common good of the community and the general public. Your HOA must promote social welfare to be tax-exempt. To operate under Section 501(c)(4), complete and submit form 8976 on the IRS website.
IRC Section 501(c)(7)
Your HOA can qualify for tax exemption under Section 501(c)(7) of the Internal Revenue Code if you register it as a social club. This tax exemption option is straightforward and has less stringent requirements. However, you may have to amend your HOA’s governing documents to be eligible. For instance, associations cannot impose architectural guidelines on members when operating as a social club lest they lose their exempt status. Your HOA must use membership fees or assessments to support its operations. Additionally, membership must remain limited, and your HOA’s revenue must benefit anyone with a personal interest in its activities. To apply for Section 501(c)(7), complete for 1024 on the IRS website.
IRC 528
The Internal Revenue Code 528 exempts homeowners associations from paying taxes on assessments, membership fees, and dues. However, this tax exemption for HOA is only achievable if your association utilizes assessments and dues for community maintenance.
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