The following tax exemption statuses are available to the Homeowner Associations (HOA): Sec. 528, sec. 501 (c) (4), and sec. 501 (c) (7).
528 exemption status
Out of all the herein stated exemption statuses, this status is the easiest one to obtain. A condominium management association, a residential real estate management association or a timeshare association can qualify for this exemption status. To qualify as a homeowners association under this section, the HOA has to meet the following tests:
- Yearly, at least 60% of the association's gross income must come from an exempt function income; and
- Yearly, at least 90% of the association's expenses must be directly connected to the exempt function income; and
- No private shareholder or individual can profit from the association's net earnings except by providing some services for the association property; and
- To be treated as a homeowners association, the yearly election under section 528 must be requested.
Under this exemption, the HOA will be exempt from exempt function income such as membership dues and association dues. However, unrelated activities and interest or investment income will not be exempt under this status and have to be taxed.
After accounting for unrelated activities, interest and investment income as well as expenses and standard deductions, a condominium and residential real estate association will have to pay a 30% flat rate tax on its net taxable income, and a timeshare association will pay 32% on its net taxable income.
501 (c) (4) exemption status
Only HOAs that exclusively operated for the promotion of the general public can qualify under this section. After having been qualified and exempt under the Sec. 501 (c) (4), the HOA is fully exempt from income taxes.
501 (c) (7) exemption status
The following HOAs may qualify for exemption under IRC § 501(c)(7): college fraternity and sorority clubs and some other social clubs. However, the HOA can only be exempt on income coming from the members' activities and will have to pay taxes on all other (nonmember) income. Nonetheless, only up to 35 percent of nonmembers' incomes can be received by the HOA for the year. Otherwise the HOA will lose its exempt status.