Yes. Condo associations do file tax returns—one every year with the IRS, even when the association is organized as a nonprofit under state law and even when it owes no tax. The IRS treats a condo association as a corporation for federal tax purposes, so the annual return is mandatory. Most associations file either Form 1120 (the standard corporate return) or Form 1120-H (a simplified return built for homeowners associations), and the choice can swing the tax bill by thousands of dollars.
State Nonprofit Status Does Not Mean Federally Tax-Exempt
Board members often assume that because the association is a nonprofit under state law, it owes nothing to the IRS. That assumption is wrong. Federal tax exemption is a separate status that has to be applied for and granted. Unless the association has been recognized as tax-exempt under Section 501(c)(4), the IRS treats it as a regular corporation with a filing obligation.1Internal Revenue Service. IRC Section 501(c)(4) Homeowners Associations
Qualifying for 501(c)(4) is rare for residential condo associations. The organization has to operate for the general welfare of the broader community, not the private benefit of its members. A gated complex with a pool restricted to unit owners does not meet that standard, and the association still has to file a formal exemption application.2Internal Revenue Service. Homeowners Associations
Form 1120 vs. Form 1120-H
Because nearly all condo associations lack federal exemption, they file as corporations. Two forms are on the table: Form 1120, the standard corporate return, and Form 1120-H, created for homeowners associations under Section 528 of the Internal Revenue Code.3Office of the Law Revision Counsel. 26 USC 528 – Certain Homeowners Associations
The main appeal of Form 1120-H is that it excludes exempt function income—mostly owner assessments—from gross income entirely. Only non-exempt income like bank interest or rental revenue is taxed, at a flat 30% rate. Form 1120 uses the 21% corporate rate, but all net income can potentially be taxed, including assessments.4Internal Revenue Service. Instructions for Form 1120-H5Office of the Law Revision Counsel. 26 USC 11 – Tax Imposed
In practice, most associations collect far more in assessments than they earn in outside income. An association bringing in $500,000 of dues and $3,000 of bank interest would owe 30% of $3,000, or $900, on Form 1120-H. Filing Form 1120 could expose a much larger figure to tax. The IRS instructions tell associations to compare the total tax under both forms and file whichever is lower.4Internal Revenue Service. Instructions for Form 1120-H
The Form 1120-H election is made annually, by filing a properly completed Form 1120-H for that year.6eCFR. 26 CFR 1.528-8 – Election to Be Treated as a Homeowners Association A bad year does not lock the association out permanently. It just has to meet two tests to elect for that year.
The 60 Percent Income Test
At least 60% of the association’s gross income must come from membership dues, fees, or assessments paid by unit owners.3Office of the Law Revision Counsel. 26 USC 528 – Certain Homeowners Associations For a typical condo association where dues and special assessments account for the bulk of revenue, this threshold is easy. Associations with significant commercial revenue—leasing parking to outsiders, running a fitness center open to the public, renting event space—need to watch the ratio.
The 90 Percent Expenditure Test
At least 90% of annual expenditures must go to managing, maintaining, and caring for association property.3Office of the Law Revision Counsel. 26 USC 528 – Certain Homeowners Associations Landscaping, roof repairs, elevator maintenance, insurance, and reserve fund contributions count. Lobbying, entertainment, and charitable donations do not, and they chip away at the 90%.
Miss either test and the association files Form 1120 for that year.
Exempt Function Income vs. Non-Exempt Income
Getting this split right is where most of the real work at tax time happens, because it drives both the 60% test and the tax owed.
Exempt function income is money received from unit owners in their capacity as owners.3Office of the Law Revision Counsel. 26 USC 528 – Certain Homeowners Associations Typical examples:
- Monthly or quarterly assessments for common-area upkeep
- Special assessments for major projects like roof replacement
- Late charges billed to owners on overdue assessments
Non-exempt income is everything else. The IRS instructions cite bank account interest as a clear example.4Internal Revenue Service. Instructions for Form 1120-H Other common sources include interest on reserve accounts, cell tower lease rent, vending machine revenue, and fees charged to non-residents for using amenities.
On Form 1120-H, only non-exempt income is taxable, and the association can subtract expenses directly connected to producing that income. If the association earns $4,000 in interest and $2,000 from a laundry room, tax applies only to what remains after related expenses come out.4Internal Revenue Service. Instructions for Form 1120-H
The Revenue Ruling 70-604 Vote
Condo associations often collect more in assessments during a year than they actually spend. Without planning, that surplus could be treated as taxable income. Revenue Ruling 70-604 gives associations a way out: members can vote to apply the excess to the following year’s budget, which keeps it out of current-year gross income.7Internal Revenue Service. INFO 2004-0231 – Revenue Ruling 70-604 Guidance
The election is a membership vote. The board cannot make it on its own. More than half of the members present at a properly noticed meeting, typically the annual meeting, must vote in favor. Document the result in the minutes and have an officer sign a resolution the tax preparer can attach to the return. Many associations make this a standing agenda item at every annual meeting so it does not get missed.
Skipping this vote is one of the most common tax mistakes in condo management. An association that runs a $50,000 surplus and never holds the 70-604 vote can end up owing tax on money it planned to spend the next year anyway.
Deadlines, Extensions, and Estimated Payments
Form 1120-H and Form 1120 are due by the 15th day of the 4th month after the association’s tax year ends. For calendar-year filers—which is nearly everyone—that is April 15.4Internal Revenue Service. Instructions for Form 1120-H
Filing Form 7004 grants an automatic six-month extension, pushing the deadline to October 15 for calendar-year filers.8Internal Revenue Service. About Form 7004 – Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns The extension covers paperwork only. Any tax owed is still due April 15, and interest and penalties run on unpaid amounts from that date.
If the association expects to owe $500 or more in federal tax, it must make quarterly estimated payments during the year.9Internal Revenue Service. Estimated Taxes For a calendar-year association, quarterly due dates fall on April 15, June 15, September 15, and December 15, and federal deposits must be made electronically, generally through EFTPS.10Internal Revenue Service. Publication 509 (2026) Tax Calendars Small associations with minimal non-exempt income usually owe less than $500 in total and can skip the quarterly cycle, but associations with meaningful investment income or commercial revenue should run the numbers early.
Penalties for Filing Late
The IRS applies its standard failure-to-file penalty to a late corporate return: 5% of the unpaid tax for each month or partial month the return is late, capped at 25%.11Internal Revenue Service. Failure to File Penalty If the return is more than 60 days late, the minimum penalty is $525 or 100% of the unpaid tax, whichever is less. A separate failure-to-pay penalty of 0.5% per month runs on any tax not paid by the due date, and interest accrues on top.
An association that owes no tax will not face a dollar penalty for filing late, because 5% of zero is zero. But filing late is still a bad idea. It can delay the 1120-H election, create problems if the IRS later disputes the zero-tax calculation, and read as sloppy management to unit owners looking at association finances.
State Returns Are Separate
Federal filing is not the whole picture. Nearly every state with a corporate income tax or gross receipts tax also requires the association to file a state return, and only a handful of states impose no corporate income tax at all. Forms, rates, and deadlines vary widely, so the association’s preparer should confirm the state requirements at the location. Some states also charge annual registration or report fees for corporate entities, which are separate from income tax.