IRS Section 528 for Homeowners Associations: Tests and Election

To qualify for the IRS Section 528 election, a homeowners association must be organized as a condominium management, residential real estate management, or timeshare association, satisfy four annual tests covering its income sources, spending, property, and private inurement, and then file Form 1120-H by its tax deadline every year it wants the treatment. Clearing those requirements lets the association exclude member dues and assessments from federal taxable income and pay tax only on income that falls outside its maintenance mission.

Which Associations Can Elect Section 528

Section 528 is written for three specific organizational types: condominium management associations, residential real estate management associations, and timeshare associations.{¹} The organization has to exist primarily to manage and maintain shared property for its members.

There’s a residential-use boundary built into the statute. A condominium management association qualifies only if substantially all of its units are used as residences, and a residential real estate management association qualifies only if substantially all of the lots or buildings in its subdivision may be used solely for residential purposes.{¹} Section 528 doesn’t define “substantially all” with a hard percentage. An association carrying a few commercial units in an otherwise residential building likely still qualifies; one with a meaningful commercial component may not, and that call is worth running past a tax advisor before filing.

The Four Annual Tests

Qualification isn’t a one-time status. The association has to pass each of the following tests every taxable year.

60 Percent of Income From Members

At least 60 percent of gross income for the year must come from membership dues, fees, or assessments collected from unit or lot owners, and that income has to be collected to fund the association’s property management and maintenance work. Bank interest, facility rentals to outsiders, and vending or laundry revenue don’t count toward the threshold.{¹}

90 Percent of Spending on the Property

At least 90 percent of the association’s expenditures for the year must go toward acquiring, managing, maintaining, or improving association property. Routine maintenance, utilities, insurance, and contributions to capital reserves all qualify. Political activity, unrelated business ventures, and anything disconnected from the shared property do not.{¹}

Association Property Owned by the HOA or Its Members

The property being managed must be owned by the association itself or by its members, and it has to benefit the membership. Pools, clubhouses, parks, private roads, and shared landscaping are typical examples. The point is that Section 528 covers organizations maintaining property that serves the people paying the assessments.

No Private Inurement

No part of the association’s net earnings may benefit any private individual. The statute allows two narrow exceptions: spending on association property and rebating excess dues back to members. Beyond those, board members, officers, and individual homeowners cannot pull a personal financial benefit out of the association’s income.{¹}

How the Election Gets Made

Section 528 treatment is not automatic. The association elects it by filing Form 1120-H, “U.S. Income Tax Return for Homeowners Associations,” for the year.² Filing the form on time is the election. There is no separate application and no pre-approval from the IRS.

The election is annual. An HOA can file Form 1120-H one year and the standard corporate Form 1120 the next if the numbers come out better that way. The right form should be chosen fresh each year based on the actual income mix.

For calendar-year associations, Form 1120-H is due April 15. More generally, the return is due by the 15th day of the fourth month after the end of the tax year. Associations with a fiscal year ending June 30 have to file by the 15th day of the third month after year-end.{³} An automatic six-month extension is available by filing Form 7004 before the original due date.

Skipping the filing has a specific consequence: the association defaults to standard corporate taxation on Form 1120, and all net income, including member assessments, enters the tax base at the regular 21 percent corporate rate. The association also has to file Form 1120-H in years with zero taxable income if it wants the election preserved. Not filing because nothing is owed means no election was made for that year.

What Section 528 Actually Shields

The benefit of the election is the exclusion of “exempt function income” from the federal tax base. Exempt function income is money received as membership dues, fees, or assessments from owners of residential units or lots, collected to fund the management and maintenance of association property.{} Regular monthly assessments covering landscaping, utilities, and common-area repairs count. So do special assessments for capital projects like roof replacements or repaving. What matters is that the money comes from owners acting as members, not as customers buying a service.{⁴}

The member-versus-customer line is where classification gets tricky. A homeowner’s monthly assessment is exempt function income because paying it is a condition of ownership. If the same homeowner pays a fee to rent the clubhouse for a birthday party, that fee is not. It was paid for a service, not as a membership obligation.

When collections exceed spending for the year, Revenue Ruling 70-604 lets the membership vote to apply the excess to the following year or refund it, which keeps the surplus out of current-year taxable income. The vote has to happen at a duly organized meeting of the full membership, not just a board vote.

How the Non-Exempt Side Is Taxed

Income from outside the exempt function stays taxable. That typically means interest earned on bank accounts and reserves, rental fees from non-members using association facilities, and revenue from vending or laundry operations.

Taxable income on Form 1120-H starts with total non-exempt income, less expenses directly connected to producing it. If the association rents its pool to outside groups, the portion of pool maintenance, supplies, and utilities tied to the rental is deductible. The association then subtracts a flat $100 specific deduction unique to Form 1120-H filers.{²}

What’s left is taxed at a flat 30 percent for condominium management associations and residential real estate management associations, and 32 percent for timeshare associations.{²} Net operating losses on Form 1120-H cannot be carried forward to offset future years.

When Form 1120 Is the Better Call

The 30 percent flat rate on Form 1120-H is higher than the standard 21 percent corporate rate on Form 1120. The question for each year is whether the tax saved by shielding assessments on Form 1120-H outweighs the higher rate on everything else.

When non-exempt income is small relative to total assessments, Form 1120-H almost always wins. When an association earns substantial interest or rental income, or carries large deductible expenses that would offset assessment income on Form 1120, the math can flip. Form 1120 filers also get to carry forward net operating losses and claim a broader range of deductions. Running the numbers both ways each year is the only reliable way to pick.

Recordkeeping to Hold the Election

The 60 percent and 90 percent tests have to be proven every year, so the accounting system needs to separate exempt function income from non-exempt income and track spending by category. Weak records don’t just create audit problems; they can disqualify the Section 528 election and force the association onto Form 1120 retroactively.

Shared expenses are the hardest part. General administrative costs, management salaries, and office supplies serve both exempt-function work and any non-exempt activities, and they have to be split using a reasonable, consistent method. Allocating by manager hours logged against each activity is one defensible approach. A revenue-based percentage is another. Whatever method is chosen, it has to be applied the same way year over year.

What Late Filing Costs

Missing the Form 1120-H deadline carries consequences beyond losing the election. For returns required to be filed in 2026, an association that files more than 60 days late faces a minimum penalty equal to the lesser of the tax due or $525.{³} The standard late-filing penalty runs 5 percent of unpaid tax per month, capped at 25 percent, with a separate 0.5 percent per month late-payment penalty on unpaid balances.

Interest compounds daily on anything unpaid. The IRS corporate underpayment rate adjusts quarterly; it was 7 percent annually for the first quarter of 2026. Even on a modest tax bill, the combination of penalties and compounding interest adds up fast once the deadline passes, which is why the annual Form 1120-H filing belongs on the board’s calendar as a fixed obligation rather than a task that only matters when there’s a balance to pay.

1
Office of the Law Revision Counsel. 26 US Code 528 – Certain Homeowners Associations
2
Internal Revenue Service. Form 1120-H – US Income Tax Return for Homeowners Associations
3
Internal Revenue Service. Instructions for Form 1120-H
4
Internal Revenue Service. 26 CFR 1.528-9 – Exempt Function Income