Do HOAs Pay Taxes? Form 1120-H, Deadlines, and State Rules

Yes, homeowners associations do pay taxes. Most HOAs file federal income tax returns each year and owe tax on investment earnings, rental income, and other revenue that doesn’t come from member dues or assessments. Under Section 528 of the Internal Revenue Code, an HOA can exclude member payments from taxable income and pay a flat 30% rate on the rest. Depending on the association’s situation, it may also owe payroll taxes on employee wages, property taxes on common areas it owns, sales tax on certain transactions, and state income tax.

What Income Is Actually Taxed

The key distinction for HOA taxes is between exempt function income and everything else. Exempt function income is money collected from homeowners as dues, fees, or assessments in their capacity as property owners. When an HOA elects Section 528 treatment, that income is excluded from gross income entirely.¹

Everything else is potentially taxable. Common examples:

Interest and dividends earned on reserve fund accounts or invested reserves
Rental income from non-members using a clubhouse, community room, or parking spaces
Lease payments from cell tower agreements, utility easements, or billboards on common property
Vending and laundry income from coin-operated machines on HOA property

Tax applies only to net non-exempt income, so the HOA can subtract expenses directly connected to producing that income before calculating what it owes.¹ If an HOA earns $800 of bank interest and has no offsetting deductions, the federal tax bill is $240. Many small associations with modest reserve earnings end up owing surprisingly little.

Which Return an HOA Files

HOAs choose between two federal returns each year and can file whichever produces less tax. The Section 528 election is not permanent; it has to be made fresh each year by filing a properly completed Form 1120-H by the return’s due date, extensions included.²

Form 1120-H

Most HOAs file Form 1120-H because it is simpler and automatically excludes exempt function income. Two tests must be met each year:³

At least 60% of the HOA’s gross income must come from exempt function income.
At least 90% of the HOA’s spending must go toward acquiring, building, managing, maintaining, or caring for association property.

The rate on Form 1120-H is a flat 30% for condominium and residential real estate management associations, and 32% for timeshare associations.¹ It sounds steep, but it applies only to the slice of income that isn’t exempt function income.

Form 1120

Form 1120 is the standard corporate income tax return. All income is potentially taxable under it, including member assessments, though the HOA can claim deductions against the full range of expenses. The corporate rate is a flat 21%.⁴ An HOA might come out ahead on Form 1120 in a year when non-exempt income is unusually high relative to deductible expenses, since 21% beats 30%. The IRS instructions for Form 1120-H suggest comparing the two and filing whichever produces the smaller bill.⁵

What About 501(c)(4) Tax-Exempt Status

A small number of HOAs qualify as tax-exempt social welfare organizations under Section 501(c)(4), but the bar is high. The IRS presumes an HOA exists primarily for its members’ private benefit and therefore does not qualify. To overcome that presumption, the association must serve a community resembling an area normally identified with a government, must not maintain the exteriors of private homes, and must keep its common areas open to the general public.⁶ A gated community with a members-only pool almost certainly fails. The vast majority of HOAs file under Section 528 instead.

Deadlines and Late Penalties

A calendar-year HOA must file by April 15 of the following year. An automatic six-month extension is available by filing Form 7004 before the original deadline, but the extension only extends the time to file, not the time to pay.⁷ If the HOA expects to owe, it should still pay by April 15.

Filing late triggers a penalty of 5% of the unpaid tax per month (or partial month), capped at 25%. For returns due in 2026, if the return is more than 60 days late, the minimum penalty is the lesser of the tax due or $525.³ A separate failure-to-pay penalty of 0.5% per month applies to unpaid tax, also capped at 25%.⁸ The two penalties stack.

Payroll Taxes if the HOA Has Employees

An HOA that employs staff, whether a property manager, maintenance worker, or front-desk attendant, takes on payroll tax responsibilities like any other employer.

For FICA, the HOA pays 6.2% for Social Security and 1.45% for Medicare on each employee’s wages, a combined 7.65%, and withholds the same 7.65% from the employee’s paycheck. The Social Security portion applies only to the first $184,500 of wages in 2026; Medicare has no cap.⁹

FUTA (federal unemployment tax) is an employer-only tax and is not withheld from employee wages. The standard rate is 6.0% on the first $7,000 of each employee’s annual wages, but a credit of up to 5.4% for state unemployment contributions typically drops the effective federal rate to 0.6%.¹⁰ State unemployment tax is owed on top of that and varies by state and by the association’s claims history.

Property and Sales Taxes

HOAs typically own common areas such as clubhouses, pools, parks, and parking structures. Those properties are subject to local property tax assessed by the county or municipality. Individual homeowners pay property tax on their own units; the HOA’s bill covers the shared assets. Assessment methods and rates vary widely by jurisdiction.

Sales tax can come into play from two directions. An HOA that sells goods or charges outside parties for services, such as renting a banquet hall to non-members or running a small pro shop, may need to collect and remit sales tax. The HOA also pays sales tax on materials and services it buys for maintenance and repairs. Whether an HOA qualifies for any sales tax exemption on its own purchases depends entirely on state law.

State Income Tax

Federal taxes are only part of the picture. Most states with a corporate income tax also require HOAs to file a state return. Rates among states that impose the tax range from roughly 2.5% to nearly 10%, and the specific brackets and treatment of exempt function income vary. Some states piggyback on the federal Section 528 election and exclude the same exempt function income at the state level; others don’t. A handful of states have no corporate income tax at all. Because the rules differ so much, boards should confirm their state’s requirements with a local tax professional or the state revenue department.

Can Homeowners Deduct Their HOA Fees

For a primary residence, almost always no. The IRS classifies HOA dues, condominium association fees, and common charges as nondeductible personal expenses. They also can’t be deducted as real estate taxes, because they are imposed by a private association rather than a government.¹¹

Two situations change that result. If you rent out a home or condo that belongs to an HOA, dues and assessments paid for maintenance of common areas are deductible as rental expenses on Schedule E. Special assessments for capital improvements, such as a new roof or elevator, cannot be deducted immediately; instead, you recover your share of the cost through depreciation over the improvement’s useful life.¹²

If you use part of your home exclusively and regularly as your principal place of business, a percentage of your HOA fees proportional to the office space may be deductible as part of the home office deduction.¹¹

1
U.S. Code. 26 USC 528 – Certain Homeowners Associations
2
eCFR. 26 CFR 1.528-8 – Election to Be Treated as a Homeowners Association
3
Internal Revenue Service. Instructions for Form 1120-H
4
Office of the Law Revision Counsel. 26 USC 11 – Tax Imposed
5
Internal Revenue Service. 2025 Instructions for Form 1120-H
6
Internal Revenue Service. IRC Section 501(c)(4): Homeowners’ Associations
7
Internal Revenue Service. Instructions for Form 7004 (Rev. December 2025)
8
Internal Revenue Service. Topic No. 653, IRS Notices and Bills, Penalties and Interest Charges
9
Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates
10
Internal Revenue Service. FUTA Credit Reduction
11
Internal Revenue Service. Publication 530 (2025), Tax Information for Homeowners
12
Internal Revenue Service. Publication 527 (2025), Residential Rental Property