Can a Homeowners Association Make a Profit? Surplus and Tax Rules

An HOA cannot make a profit in the ordinary sense of the word. Homeowners associations are organized as non-profit corporations, and federal tax law under IRC §528 forbids any part of an association’s net earnings from benefiting a private individual, whether that’s a board member, an officer, or a homeowner.¹ What an HOA can do, and routinely does, is collect more in dues than it spends in a given year, earn interest on reserves, and pull in outside money from things like cell tower leases. That excess is a surplus, not a profit, and the rules about where it goes and how it gets taxed are what actually matter to homeowners.

Why the Non-Profit Label Blocks Distributions

HOAs are almost always incorporated as not-for-profit corporations under state law.² The label doesn’t mean the association can’t take in money or sit on substantial assets. It means the entity exists to manage common property and serve the collective interests of its members, and any money it collects has to be funneled back into the community.

Federal tax law reinforces the state-law structure. Under §528, no part of a qualifying HOA’s net earnings can benefit any private individual, with two narrow exceptions: maintaining association property, or rebating excess dues back to members.¹ A board member who routes association money into a personal account isn’t just violating the bylaws. That conduct exposes the director to civil liability for breach of fiduciary duty and, depending on the amount and the state, criminal prosecution.

Surplus vs. Profit: Where Extra Money Actually Goes

When an HOA collects more in assessments than it spends, that excess is a surplus. The association can’t write checks to board members or issue dividends to homeowners. The governing documents and state law dictate where the money goes instead, and the board has three realistic options.

Move the surplus into the reserve fund, strengthening the community’s ability to pay for future capital projects without a special assessment.
Carry the surplus into the next year’s operating budget, which can lower the following year’s dues.
Issue a credit against future assessments or refund the excess directly to members, though most boards prefer to build reserves.

None of these paths pay anyone personally. They either delay the collection of future dues or fund work the association would eventually have to pay for anyway.

How Revenue Ruling 70-604 Keeps a Surplus Untaxed

Surplus dues have real federal tax implications. If the association does nothing, that excess membership income is potentially taxable. Revenue Ruling 70-604, issued by the IRS in 1970, gives HOAs a way out: if the membership votes at a duly organized meeting to either apply the excess to the next year’s assessments or refund it, the surplus is not treated as taxable income to the association.

The vote has to happen at a meeting of the full membership, not just the board, and the results need to be documented in the meeting minutes. Most well-run associations put this vote on the agenda at every annual meeting so the option is always preserved.

How Federal Tax Actually Hits HOA Income

Even though HOAs are non-profits under state law, they still owe federal income tax on certain kinds of income. The IRS gives associations two main filing options, and the choice matters.

Form 1120-H, the HOA-Specific Return

Filing Form 1120-H is an annual election under IRC §528 that lets the association exclude its exempt function income from taxation entirely. Exempt function income means dues, fees, and assessments collected from member-owners.³ Everything else, including interest on reserve accounts, cell tower lease payments, and rentals to non-members, gets taxed at a flat 30% rate.¹

To qualify for Form 1120-H, the association has to meet two threshold tests each year. At least 60% of its gross income must come from member assessments, and at least 90% of its expenditures must go toward acquiring, building, managing, or maintaining association property.³ An HOA with a large commercial lease could fail the 60% test and lose access to this option.

Form 1120, the Standard Corporate Return

Any HOA can file a regular corporate return on Form 1120 instead. The standard corporate rate is 21%, lower than the 30% flat rate under 1120-H. The trade-off is that Form 1120 does not automatically exclude member assessments from income, so the association still has to rely on Revenue Ruling 70-604 to keep surplus dues from being taxed. The IRS itself advises associations to compare the total tax under each form and file whichever produces the lower bill.³

In practice, 1120-H is simpler and works well when income is almost entirely member assessments with modest interest or rental income. Form 1120 can produce a lower bill when the association has significant non-exempt income, because 21% beats 30% on that slice.

The 501(c)(4) Exemption Is Rarely Available

A small number of HOAs qualify for full tax-exempt status under IRC §501(c)(4). The bar is high. The association has to serve a community that resembles a governmental subdivision, its common areas must be open to the general public, and it cannot primarily maintain private residences.⁴ A gated community with restricted access to its own streets and sidewalks will not qualify, which is why §528 exists as the accessible alternative for the typical HOA.

Non-Exempt Income: Where “Profit” Gets Complicated

Outside money is where the profit question gets interesting. A cell tower company paying $1,500 a month to lease rooftop space, a non-resident renting the community room for a wedding, or interest accumulating in the reserve account all count as non-exempt income. Under Form 1120-H, that income is taxed at 30% after subtracting directly connected expenses.¹

An HOA that chases too much commercial revenue creates two problems. If non-member income tops 40% of gross income, the 60% test fails and 1120-H is off the table.³ Heavy commercial activity can also undercut the association’s non-profit character at the state level, exposing it to additional state taxes or legal challenges from homeowners who object to the board running a side business. The money still can’t be distributed as profit either way. It just gets taxed harder.

Your Right to See the Books

Because homeowners can’t take a distribution, oversight is the tool they actually have. State laws and governing documents give homeowners the right to inspect the HOA’s financial records: annual budgets, balance sheets, income and expense reports, and meeting minutes where financial decisions were made. Associations can charge a reasonable per-page copying fee, but they can’t refuse access to the records themselves. Reviewing these documents is the first step whenever the numbers don’t add up.

Reserve Studies

A reserve study is a professional assessment of the community’s major components, such as roofs, elevators, parking surfaces, and pools, estimating remaining useful life and replacement cost. The Community Associations Institute recommends updating a study at least every three years, and older or more complex properties may need more frequent reviews. A growing number of states have enacted or strengthened reserve study requirements in recent years, driven in part by the 2021 Surfside condominium collapse in Florida.

Reserves connect back to the profit question directly. An adequately funded reserve account is the single best way to avoid a special assessment. Chronically underfunded reserves mean either large sudden bills or deferred maintenance until problems become emergencies, and neither serves the community.

Audits and Reviews

Many state laws and governing documents require periodic audits or reviews by an independent accountant. An audit provides the highest level of assurance that the financials are accurate and that spending matches the budget. A review is less rigorous but still involves an accountant evaluating whether the numbers look reasonable. Larger associations with bigger budgets are more likely to require a full audit. If the governing documents are silent, pushing for at least a periodic review is worth the effort, especially after a change in board leadership or management companies.

When a Board Treats HOA Money Like Profit

The non-profit structure doesn’t make HOAs immune to financial misconduct. Directors who award contracts to their own businesses, pad management fees, or divert funds into personal accounts breach their fiduciary duty to the association. Homeowners can sue individually or as a group to recover misappropriated funds, remove directors, and force an accounting. Depending on the state and the severity of the conduct, criminal charges for embezzlement or fraud are also available.

Short of outright theft, mismanagement through incompetence is more common and harder to fight. A board that consistently underbudgets, ignores reserve study recommendations, or skips filing tax returns creates damage that homeowners inherit through special assessments and declining property values. Attending board meetings, reading the financials, and voting in board elections remain the most effective tools homeowners have to keep the surplus doing what it’s supposed to do.

1
Office of the Law Revision Counsel. 26 USC 528 – Certain Homeowners Associations
2
Justia. Homeowners’ Associations and Their Legal Powers
3
Internal Revenue Service. Instructions for Form 1120-H (2025)
4
Internal Revenue Service. Homeowners’ Associations Under IRC 501(c)(4)