Are Condo Associations Non-Profit or Tax-Exempt?

Condo associations are generally non-profit corporations under state law, but they are not tax-exempt in the way a charity is. So the answer to whether condo associations are non-profit or tax-exempt is usually “non-profit, but still taxable”: the IRS treats them as taxable entities that must file a federal return each year and pay income tax on certain revenue, even though their state paperwork calls them non-profits.

Two Different Labels, Two Different Meanings

The confusion comes from stacking two separate legal concepts on top of each other. “Non-profit” is a state-law corporate form. “Tax-exempt” is a federal tax status granted by the IRS. An organization can be one without being the other, and condo associations almost always are.

On the state side, a condo association typically starts life when someone files articles of incorporation establishing it as a non-stock, non-profit corporation.¹ That gives the association a legal identity apart from the unit owners. It can hold title to common areas, sign contracts, and sue or be sued in its own name. There are no shares and no investors expecting a return. That is what “non-profit” means here: the entity was not formed to generate profits for shareholders.

On the federal side, the IRS asks a different question: does the organization operate for public benefit or private benefit? A 501(c)(3) charity like a food bank or a university exists to serve the public. A condo association exists to serve its own members: it maintains a pool, repaves a parking lot, keeps the landscaping presentable. The IRS calls this a mutual benefit organization, and mutual benefit does not qualify for the exemptions, donation deductions, or nonprofit postal rates available to public charities.²

One consequence for owners: monthly dues are not tax-deductible. The IRS explicitly lists homeowners association fees, condo association fees, and common charges as nondeductible payments, and assessments cannot be deducted as real estate taxes because the association, not a government, imposes them.³

How the IRS Taxes a Condo Association

Because the association is not exempt, it files a federal income tax return every year. Most file Form 1120-H, which lets the association elect treatment under Section 528 of the Internal Revenue Code.⁴ Under that election, the association excludes what the IRS calls “exempt function income,” meaning dues, fees, and assessments collected from unit owners to fund routine operations.⁵

Everything else is taxable. Interest on the association’s bank accounts, rent from a cell tower on the roof, revenue from vending machines or laundry facilities — all of it is taxed at a flat 30% rate after a $100 standard deduction.⁵ That rate is higher than the standard 21% corporate rate, which is why some associations look at Form 1120 instead.

The 60/90 Tests

Filing Form 1120-H is not automatic. Section 528 requires the association to pass two numerical tests each year:

At least 60% of the association’s gross income must come from dues, fees, or assessments collected from unit owners.⁵
At least 90% of the association’s spending must go toward acquiring, building, managing, maintaining, or caring for association property.⁵

An association with heavy commercial rental income can fail the 60% test and lose the ability to file Form 1120-H for that year. Spending significantly on activities unrelated to property management can break the 90% test. Boards should track both ratios during the year, not at tax time.

Deadlines and Penalties

Form 1120-H is due by the 15th day of the fourth month after the association’s tax year ends, so a calendar-year association files by April 15.⁴ Filing Form 7004 before the deadline grants an automatic extension of time to file but does not extend time to pay.

Late returns get expensive. The failure-to-file penalty is 5% of the unpaid tax for each month the return is late, up to 25%. For returns due after December 31, 2025, the minimum penalty for a return more than 60 days late is $525 or the amount of tax due, whichever is smaller.⁶

Form 1120-H or Form 1120: Which One Costs Less

The 1120-H election is convenient but not always the cheapest path. The IRS itself suggests comparing the total tax under both forms and filing whichever produces the lower bill, and the choice can be made fresh each year.⁴

Form 1120-H is simpler. It eliminates estimated tax payments and the alternative minimum tax. It also taxes non-exempt income at 30%, allows only a $100 deduction, and blocks the association from claiming a net operating loss carryforward.⁴ Form 1120 taxes income at 21% and permits a wider range of deductions, but it requires quarterly estimated payments and more complex bookkeeping.

Form 1120 also brings Section 277 into play. Deductions related to furnishing services or goods to members can only offset income from members; excess member-related deductions roll forward rather than shielding non-member income.⁷ That effectively walls off the two income streams.

The math tends to favor 1120-H when non-exempt income is small, like a few thousand dollars in bank interest. Associations with substantial non-member revenue, or losses from a prior year, should run the numbers both ways.

The 501(c)(4) Exception Most Condos Cannot Use

A small number of associations qualify for real tax-exempt status under Section 501(c)(4) as social welfare organizations. The IRS requires the association to operate primarily for the general public, not just its members, and specifically expects:⁸

A service area resembling a recognizable governmental unit, not a gated enclave.
No exterior maintenance of individual residences.
Common facilities open to the general public, not restricted to residents.

The second requirement disqualifies most condo buildings on its own, because maintaining exteriors, roofs, and hallways is a core function. Large subdivisions with public roads and open green spaces sometimes qualify. Typical condo associations do not, which is why the Section 528 election on Form 1120-H is the norm.

Surplus Funds Cannot Be Handed Back as Profits

Section 528 requires that no part of the association’s net earnings benefit any private shareholder, except through property management activities or a rebate of excess dues.⁵ Violating the non-distribution rule can strip Section 528 eligibility entirely.

When assessments in a year exceed actual expenses, IRS Revenue Ruling 70-604 gives boards a way to keep the surplus out of taxable income: members vote either to refund the excess or to apply it against the next year’s assessments. The surplus can also go into a reserve fund for future capital work like roof replacements or elevator upgrades. Boards should hold the Revenue Ruling 70-604 vote at or before the annual meeting; skipping it can leave the surplus exposed as taxable income.

Payroll Taxes Still Apply

State non-profit status does not exempt the association from employment taxes. Because condo associations are not 501(c)(3) organizations, they carry the same payroll obligations as a regular business, including:⁹

Federal income tax withholding from each employee’s pay.
Social Security tax at 6.2% each for employer and employee, on wages up to $184,500 in 2026.
Medicare tax at 1.45% each, with no wage cap.
Federal unemployment tax (FUTA), which non-profit condo associations owe even though 501(c)(3) charities do not.

Worker classification matters too. The IRS looks at behavioral control, financial control, and the nature of the relationship to decide whether someone is an employee or an independent contractor.¹⁰ If the association sets a maintenance worker’s hours, tools, and methods, that person is almost certainly an employee, and misclassifying them to avoid payroll taxes can create personal exposure for board members.

What This Means in Practice

The short version for owners and directors: the “non-profit” label on the association’s state paperwork describes its corporate form and nothing more. Federal income tax still applies to non-exempt revenue. A return is due every year. Dues are not deductible to owners. Employees generate payroll taxes. Surpluses cannot be paid out as profit. Treating the non-profit designation as a pass on tax compliance is how boards end up paying penalties out of the operating budget.

1
Community Associations Institute. Community Association Governing Documents
2
Internal Revenue Service. Exempt Organization Sample Questions Organizational and Administrative Requirements
3
Internal Revenue Service. Publication 530 (2025), Tax Information for Homeowners
4
Internal Revenue Service. Instructions for Form 1120-H U.S. Income Tax Return for Homeowners Associations
5
Office of the Law Revision Counsel. 26 USC 528 Certain Homeowners Associations
6
Internal Revenue Service. Failure to File Penalty
7
Office of the Law Revision Counsel. 26 U.S. Code 277 – Deductions Incurred by Certain Membership Organizations in Transactions With Members
8
Internal Revenue Service. IRC Section 501(c)(4) Homeowners Associations
9
Internal Revenue Service. Employers Supplemental Tax Guide (Supplement to Pub. 15)
10
Internal Revenue Service. Independent Contractor (Self-Employed) or Employee?