Are HOAs Nonprofit? Tax Status and Filing Explained

Most HOAs are nonprofit organizations under state law. But “nonprofit” does not mean “tax-free.” This distinction trips up boards and homeowners alike.

An HOA’s tax status is more nuanced than it appears. The answer depends on how the association is organized, what election it makes, and what kind of income it earns.

HOA structure under state law

HOAs are typically organized as either unincorporated nonprofit associations or nonprofit corporations under state law. The specific structure depends on how the developer set up the community and what the state requires.

A nonprofit corporation is a legal entity formed under the state’s nonprofit corporation act. It can own property, enter contracts, and sue or be sued. Most modern HOAs are incorporated. Like any corporation, an incorporated HOA can also fail financially in extreme cases — see can an HOA file for bankruptcy for how that rare scenario plays out.

An unincorporated association is a group of people acting together for a common purpose without filing incorporation papers. Some older HOAs operate this way. The legal protections are generally weaker.

In either case, the “nonprofit” label means the organization does not operate for profit. It exists to manage and maintain the community. Any surplus goes back into the association — not to shareholders or members as dividends.

Nonprofit does not mean tax-exempt

This is the most common misconception about HOA taxes. Being a nonprofit under state law does not automatically make an HOA exempt from federal income tax.

The IRS treats HOAs as taxable entities. They must file a federal tax return every year. The question is which return and at what rate.

HOAs earn income from several sources. Assessment dues are the largest. But many associations also earn interest on reserve accounts, rental income from common-area facilities, and other non-assessment revenue. The tax treatment depends on the type of income and the election the HOA makes.

Option 1: IRC Section 528 election (Form 1120-H)

The most popular tax election for HOAs is Section 528 of the Internal Revenue Code. This is a special provision designed specifically for homeowners associations.

How it works

Under Section 528, the HOA’s “exempt function income” — mainly assessment dues used to manage, maintain, and improve the common areas — is not taxed. Only “non-exempt function income” is taxed.

Non-exempt income includes:

• Interest and dividends earned on bank accounts and investments.
• Rental income from leasing common facilities (like a clubhouse) to nonmembers.
• Investment gains from reserve fund investments.
• Any income not directly related to the association’s exempt function.

The tax rate on non-exempt income is a flat 30% for HOAs and 32% for condominium associations. There is no graduated rate and no deductions beyond a $100 specific deduction.

Requirements

To make the Section 528 election, the HOA must meet several tests:

• It must be organized and operated to acquire, build, manage, maintain, or care for property held in common.
• At least 60% of gross income must come from exempt function sources (typically assessments from members).
• At least 90% of expenditures must be for exempt function purposes.
• No part of net earnings may benefit any private shareholder or individual (beyond the common benefit of living in the community).

The election is made annually on Form 1120-H. It is not permanent — the HOA can choose differently each year.

Why most HOAs use it

Form 1120-H is simpler than a standard corporate return. The exempt-income exclusion means most HOAs owe little or no tax in a typical year. And the annual election provides flexibility.

Option 2: 501(c)(4) social welfare organization (Form 990)

A smaller number of HOAs qualify as tax-exempt under Section 501(c)(4) of the Internal Revenue Code. This classification is for “social welfare organizations” — entities operated exclusively for the promotion of social welfare.

Requirements

The IRS applies a stricter standard for 501(c)(4) status. The HOA must:

• Operate for the benefit of a community as a whole, not just its members.
• Maintain common areas and enforce covenants that benefit the broader community.
• Not provide services primarily for the private benefit of members.

This is a harder bar to clear. An HOA that restricts access to amenities, gates the community, or serves only its dues-paying members may not qualify.

Benefits and drawbacks

The main benefit is that a 501(c)(4) organization may be fully exempt from tax on its exempt function income — and may also exclude some types of investment income that Section 528 would tax.

The drawbacks: the application process is more complex, the IRS scrutinizes these applications, the HOA must file Form 990 (which is public), and losing the exemption creates back-tax exposure. Most HOAs find Section 528 simpler and sufficient.

Why not 501(c)(3)?

HOAs almost never qualify as a 501(c)(3) public charity, and it’s worth ruling that out explicitly since it’s the tax-exempt status most people know best. The IRS requirements for 501(c)(3) status require an organization to operate for a recognized charitable, religious, educational, or similar public purpose, and to benefit the public broadly rather than a defined private group.

An HOA fails that test by design. It exists to maintain and enforce covenants over its own members’ properties — a private benefit to a defined group of homeowners, not a charitable purpose serving the general public. Even the more member-friendly 501(c)(4) path described above requires showing a broader community benefit; 501(c)(3) sets a materially higher bar that community associations are not built to clear. That’s why the realistic choices for an HOA stay limited to the Section 528 election or, in narrower cases, 501(c)(4) status — both covered above.

Option 3: Standard corporate return (Form 1120)

An HOA that makes neither the Section 528 election nor has 501(c)(4) status files a standard corporate income tax return on Form 1120.

Under this approach, the HOA is taxed like any other corporation. It reports all income — including assessments — and deducts allowable expenses. The net income is taxed at the standard corporate rate (currently 21%).

In practice, most HOAs that file Form 1120 end up with little taxable income because their expenses roughly equal their revenue. But the filing is more complex, and the risk of errors is higher.

Some CPAs recommend comparing the Form 1120-H result to the Form 1120 result each year. In rare cases — usually when the HOA has significant deductible expenses — the standard return produces a lower tax bill.

The Revenue Ruling 70-604 election (Form 1120 filers only)

One nuance that matters when weighing Form 1120-H against a standard Form 1120 return: IRS Revenue Ruling 70-604 only applies to HOAs filing Form 1120 — it has no effect for associations that make the Section 528 election on Form 1120-H.

Most HOAs end up with some excess membership income each year — assessment dues collected but not spent by year-end, often because a project slipped to the next fiscal year or the board built in a cushion. For an association filing the standard Form 1120, that leftover member income would otherwise become taxable non-exempt income under IRC §277. Revenue Ruling 70-604 gives Form 1120 filers a way around that: with a proper membership election, the association can either refund the excess to members or carry it forward against next year’s assessments — either way, the excess avoids tax at the association level rather than being taxed at the standard corporate rate (currently 21%).

There’s no real downside to making the election on genuine excess member income — the money still belongs to the members whether it’s refunded or rolled forward. What it can’t do: shelter the excess by moving it into the reserve fund instead, or help an association already filing Form 1120-H, since Section 528 already excludes exempt-function income for those associations and there’s no excess-member-income problem to solve. Some CPAs also debate how the election needs to be renewed from year to year — treat it as an annual conversation with your tax preparer rather than a one-time decision.

What taxes do HOAs actually pay?

Most well-run HOAs pay very little federal income tax. Their primary income is assessments, which are exempt under Section 528. The taxable income is typically limited to interest earned on reserve accounts.

For example, an HOA that earns $5,000 in interest on its reserve savings account and elects Section 528 would owe tax on that $5,000 at 30% — a $1,500 tax bill minus the $100 specific deduction, for $1,470.

State taxes

State tax treatment varies. Some states follow the federal treatment. Others impose their own franchise tax or corporate income tax on HOAs. California, for example, imposes a minimum franchise tax on incorporated HOAs.

Property taxes

HOAs generally are not exempt from property tax on real property they own. Common areas may be taxed depending on the state and how title is held. Some states exempt common areas from property tax if they are part of a recorded condominium or planned development.

Common tax mistakes HOA boards make

Tax compliance for HOAs is not complicated — but boards and self-managed associations still make preventable errors.

Failing to file at all

Every HOA must file a federal tax return every year, regardless of whether it owes tax. Failing to file results in penalties and interest. Some small self-managed associations don’t realize they have a filing obligation.

Filing the wrong form

Using Form 1120 when Form 1120-H would save money — or vice versa — is a common mistake. The board or its CPA should compare both outcomes before filing.

Misclassifying income

Treating rental income or investment gains as exempt function income leads to underreporting. The IRS is clear about what qualifies as exempt under Section 528. Interest, dividends, and rental income to nonmembers do not.

Not filing state returns

Federal filing does not satisfy state requirements. Many states require a separate return. Missing it creates penalties and potential franchise-tax liability.

Letting 501(c)(4) status lapse

If the HOA has 501(c)(4) status and fails to file Form 990 for three consecutive years, the IRS automatically revokes the exemption. Reinstatement requires a new application and back-filing.

How the HOA budget connects to taxes

The annual HOA budget drives both assessments and tax liability. A board that understands what fees cover can structure income and expenses to minimize tax exposure while meeting the association’s obligations.

Board members don’t need to be tax experts. But they should ensure the association has a CPA or tax preparer who understands HOA-specific rules. The cost of professional tax preparation is modest compared to the cost of penalties, interest, or an audit.

The bottom line

Most HOAs are nonprofit organizations that still owe federal income tax. The Section 528 election on Form 1120-H is the simplest and most common approach. It exempts assessment income and taxes only non-exempt income like interest and rental revenue.

The tax obligation is usually small. But it exists, and ignoring it creates real consequences. File every year, classify income correctly, and work with a professional who knows HOA tax rules.