Condo & HOA Taxes

Although condo associations and homeowner associations are registered as non-profit corporations at the New Mexico Public Regulation Commission (PRC) these entities still need to file a federal tax return.  Most residential homeowner associations and condominiums will file using the Form 1120-H. The 1120 is for corporations and the “H” means that it’s a condominium or homeowners association.

The Form 1120-H is a relatively simple form to complete.  60% of the association’s gross income for the tax year must be “exempt function income” and 90% of the expenses must be to “acquire, build, manage, maintain or care for its property.”  Non-exempt income is taxed at a flat rate of 30% after the first $100.00.  In the lovely terminology of the IRS, non-exempt income is any income that is not exempt function income.  Examples include bank interest, income from concessions or from rental of common facilities.

Like other commercial entities, the form is generally due to be filed by the 15th of the 3rd month after the end of the tax year.  Remember that many associations operate on a tax year other than a calendar year.

Note that the rules require that 90% of the exempt function income must be to “acquire, build, manage, maintain or care for the property.”  What about the income that is not used that year but saved for projects in future years?  In order to avoid being taxed on this income, you must segregate the funds into a Reserve Fund to use in future years.   Most CPA’s recommend that this be documented in case you need to prove that such segregation of funds was authorized.  Either there should be a Board Resolution that states that the funds shall be segregated or your budget should reflect that the funds are to be segregated.

These tips are meant as a reminder that there is tax work to be done for your association and are not to be relied upon to file your tax return.  The right thing for your community is to consult a tax professional for advice on your specific situation.

Tom Simon is the Managing Member of WestGate Properties LLC and is a Professional Community Association Manager (P-CAM) certified by the Community Association Institute

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