Revenue Ruling 70-604 lets a homeowners association keep excess member assessments out of taxable income by either refunding the surplus to members or applying it against the following year’s assessments. It only works if the association files Form 1120, the members (not just the board) vote to approve the treatment each year, and an election statement is attached to the return. Miss any of those steps and the surplus becomes ordinary taxable income at the 21 percent corporate rate.
Which Associations Qualify
The election is available to homeowners associations that meet the IRS definition under Section 528 of the Internal Revenue Code, which covers condominium management associations, residential real estate management associations, and timeshare associations. Two financial tests apply: at least 60 percent of gross income must come from membership dues, fees, or assessments, and at least 90 percent of spending must go toward managing and maintaining association property.1Office of the Law Revision Counsel. 26 USC 528 – Certain Homeowners Associations
Associations with heavy commercial income, such as substantial rent from outside businesses or revenue from operating commercial facilities, may not clear those thresholds. The ruling is built around the idea that member assessments collected for communal upkeep shouldn’t be taxed as corporate profit when they happen to exceed actual costs for the year.
Form 1120 Versus Form 1120-H
Revenue Ruling 70-604 only applies when the association files Form 1120, the standard corporate return.2Internal Revenue Service. INFO 2009-0233 – Clarification of Rev Rul 70-604 Form 1120-H is a different regime entirely: exempt function income from member assessments, dues, and fees is excluded from taxable income automatically, and only non-member income such as bank interest or rental revenue is taxed. That non-member income faces a flat 30 percent rate for condominium and residential real estate management associations, or 32 percent for timeshare associations.3Internal Revenue Service. Instructions for Form 1120-H No member vote, no election statement.
Form 1120 with the 70-604 election is more work, but non-member income is taxed at the standard 21 percent corporate rate instead of 30 percent.4Office of the Law Revision Counsel. 26 USC 11 – Tax Imposed For an association with meaningful non-member income, the nine-point spread adds up. The tradeoff is compliance risk. If the vote doesn’t happen, the resolution isn’t drafted, or the return isn’t filed on time, the excess member income becomes taxable at 21 percent with no fallback. Associations with little non-member income often find Form 1120-H simpler and safer.
What Counts As Excess Assessments
The surplus the ruling addresses is the difference between member income received and association expenses paid during the taxable year. Member income means regular assessments, dues, and fees collected from homeowners. Non-member income, including bank interest, investment returns, laundry machine revenue, and fees charged to outside parties, does not enter the 70-604 calculation and remains taxable on Form 1120 regardless of the election.2Internal Revenue Service. INFO 2009-0233 – Clarification of Rev Rul 70-604
The numbers in your resolution have to match the general ledger, and the split between member and non-member income needs to be clean. Commingling the two, or miscategorizing revenue, gives the IRS grounds to challenge the election entirely.
The One-Year Carryover Limitation
The 70-604 election is a one-year carryover, not a perpetual rollover. In General Counsel Memorandum 34613, the IRS read the ruling’s reference to “the following year’s assessments” as singular and intentional. Excess from 2025 must actually reduce what members owe in 2026. You cannot keep rolling the same surplus forward year after year without it ever offsetting real assessments.
In practice, the following year’s shortfall needs to be at least equal to the carryover amount for the election to hold up. If your association carries over $50,000 but then collects assessments the next year at the same level without reducing them, the IRS could argue the carryover was a sham and tax the surplus retroactively. Boards that consistently run large surpluses should look hard at whether they’re using the election as intended or simply over-assessing members.
Capital Reserves Are Off Limits
A common mistake is treating the election as a way to sweep excess assessments into a capital reserve fund. The IRS addressed this in Information Letter 2009-0233, stating that Revenue Ruling 70-604 “does not provide that a condominium management corporation may avoid recognizing taxable income attributable to excess assessments by accumulating the excess amount in a working capital reserve.”2Internal Revenue Service. INFO 2009-0233 – Clarification of Rev Rul 70-604 The election has two valid outcomes only: refund to members, or credit against next year’s assessments. A transfer to reserves is neither.
Special assessments for specific capital projects are a separate matter. Revenue Rulings 75-370 and 75-371 provide that special assessments collected for designated projects such as roof replacement or elevator repair, held in a separate bank account, are not taxable to the association, on the theory that the association acts as an agent for the homeowners holding the funds with a fiduciary obligation to spend them as approved.2Internal Revenue Service. INFO 2009-0233 – Clarification of Rev Rul 70-604 The assessment must be designated for a specific purpose, approved by the membership for that purpose, and kept in a separate account. General reserve contributions don’t qualify under those rulings either.
The Membership Vote
The IRS requires that the association’s members, not just the board, vote each year on what to do with any excess assessments. The ruling describes a meeting where “the stockholder-owners of the corporation” decide whether to return the excess or apply it against the following year’s assessments.2Internal Revenue Service. INFO 2009-0233 – Clarification of Rev Rul 70-604 The board cannot make this election on its own.
Timing is less clear than most guidance suggests. The ruling says only that “a meeting is held each year” and does not specify whether it must occur before or after the fiscal year closes. No published IRS guidance settles the question. The safest approach is to hold the vote before the fiscal year ends and frame it as a prospective election covering any surplus that may result. At a minimum, the vote must happen before the return is filed, because the approved election has to be attached.
Your bylaws will set the quorum requirement. If the annual meeting can’t produce quorum, a special meeting can serve the same purpose; the ruling references a yearly meeting without distinguishing between the two. Whatever the format, document it thoroughly.
Drafting the Resolution
The resolution is the written record of the membership’s decision. The ruling doesn’t prescribe a specific format or technically require a stated dollar amount, but a clear resolution is the only way to prove the election was made if the IRS asks.
A solid resolution should include:
- The full legal name of the association
- The specific fiscal year the election covers
- A clear statement that excess membership income over membership expenses will be applied against the following year’s assessments, or refunded to members
- A reference to IRS Revenue Ruling 70-604
- The date the membership approved the resolution
Most associations include the calculated surplus amount even though it isn’t strictly required. A specific number makes the resolution easier to defend and easier to reconcile with the return. The secretary should record vote results in the minutes, including attendance and the tally. Those minutes are the primary evidence if the IRS audits the election.
Filing the Election With Your Tax Return
Once the membership approves the resolution, the association communicates the election to the IRS by attaching an election statement to its Form 1120 filing. The statement should reference Revenue Ruling 70-604, identify the tax year, and describe the surplus amount being carried over or refunded. Attach the approved resolution, or a copy, as supporting documentation.
The return is due by the 15th day of the fourth month after the tax year ends.5Internal Revenue Service. Publication 509 (2026), Tax Calendars For a calendar-year association, that means April 15. Filing Form 7004 gets an automatic six-month extension to October 15. The election remains valid as long as the return and election statement are filed by the original or extended due date.
What Happens If You Miss the Election
If the vote doesn’t happen, the resolution isn’t drafted, or the election statement isn’t attached, the excess member income becomes taxable. On Form 1120, the surplus is added to other taxable income and taxed at the 21 percent corporate rate.4Office of the Law Revision Counsel. 26 USC 11 – Tax Imposed On a $50,000 surplus, that’s $10,500 that could have been avoided.
There is a potential remedy. Treasury Regulation Section 301.9100-3 allows taxpayers to request an extension of time to make certain regulatory elections by seeking a private letter ruling. The taxpayer has to show it acted reasonably and in good faith, and that granting relief won’t prejudice the government’s interests.6eCFR. 26 CFR 301.9100-3 – Other Extensions The request requires detailed affidavits from the association and any tax professional involved, explaining what went wrong and why.
This relief isn’t cheap. The standard IRS user fee for a Section 301.9100-3 letter ruling request is $14,500 in 2026, with reduced fees possible for organizations with gross income below $400,000.7Internal Revenue Service. Internal Revenue Bulletin 2026-01 For most associations, the cost of the letter ruling request will exceed the tax they’re trying to avoid. Put the 70-604 vote on the annual meeting agenda every year and treat it as non-negotiable.