IRC 528: HOA Qualification Tests, Form 1120-H, and Penalties

A homeowners association can elect special federal tax treatment under IRC Section 528 by filing Form 1120-H, which excludes member dues, fees, and assessments from taxable income and applies a flat 30% rate (32% for timeshare associations) to income from outside sources. The election is made annually on the return itself, and the association has to meet four statutory tests each year to qualify.¹

The statute splits association income into two buckets. Exempt function income, essentially money collected from members as property owners, is not taxed at all. Everything else is taxed at the flat rate after a $100 specific deduction and any expenses directly connected to producing that income.¹

Because the election is annual, an association can file Form 1120-H one year and a regular Form 1120 the next if the math points that way.

The Four Annual Qualification Tests

An association must clear every one of these hurdles for the tax year. Miss one, and the election is off the table for that year.

Organization type. The entity must be a condominium management association, a residential real estate management association, or a timeshare association, organized and operated to manage, maintain, and care for association property.¹
60% income test. At least 60% of gross income for the year must come from membership dues, fees, or assessments paid by property owners.¹
90% expenditure test. At least 90% of spending must go toward acquiring, building, managing, maintaining, or caring for association property.¹
No private benefit. None of the net earnings can benefit any private individual or shareholder, except through management and maintenance services or refunds of excess dues.¹

Residential real estate management associations carry one extra condition: substantially all the lots or buildings in the development must be used as residences.¹ A mixed-use community with significant commercial space can fail here.

The 60% and 90% tests can only be measured after the tax year closes, since they depend on full-year totals.² An unusually large non-member revenue event, say renting the clubhouse to outsiders or selling off a parcel of common land, can push the income mix past the 60% threshold and knock the association out of Section 528 for that year. Boards pursuing revenue-generating projects should watch the ratio as it develops.

What Income Is Taxed and What Isn’t

Exempt function income is limited by statute to membership dues, fees, and assessments received from members in their capacity as owners.¹ IRS instructions call out qualifying items such as assessments to cover principal, interest, and property taxes on association-owned property, payments for property maintenance, and assessments for snow removal or trash collection from common areas.³ Regular monthly dues, special assessments for repairs, and assessments earmarked for a new amenity all qualify.

Non-exempt income is anything else. The IRS instructions list payments from nonmembers, interest earned on reserve or sinking fund accounts, payments from members for special use of facilities beyond what’s available to all members, and fees for work performed on non-association property.³ The interest item catches boards off guard: money set aside responsibly for future repairs still generates taxable interest. Vending machine income, cell tower lease payments, and pool or room rental fees charged to nonmembers are taxable too. The 30% rate applies after the $100 specific deduction and directly connected expenses.¹

Form 1120-H or Form 1120

Every HOA is treated as a corporation for federal tax purposes, so the default return is Form 1120. Section 528 and Form 1120-H are the alternative, and neither is universally better.

Form 1120-H is usually simpler and cheaper. If non-exempt income is small relative to dues, excluding all member payments outweighs the higher 30% rate on modest investment or rental income, and the form itself is shorter than the standard corporate return.

Form 1120 taxes all income, member dues included, but at the 21% corporate rate rather than 30%, and it allows deductions that Section 528 prohibits. The most consequential difference: Section 528 explicitly bars any net operating loss deduction.¹ On a regular Form 1120, losses can be carried forward to offset future taxable income. Associations with substantial non-member revenue or a planned loss year, such as one absorbing a major capital project, sometimes come out ahead on Form 1120. Because the election is made annually, the numbers can be run both ways before filing.

Filing and Payment Mechanics

The election is made simply by filing Form 1120-H for the year; no separate election statement is required.⁴ Calendar-year associations file by April 15 following the close of the tax year. Fiscal-year filers file by the 15th day of the fourth month after their year end. An automatic six-month extension is available by submitting Form 7004 before the original deadline.⁵

An extension to file is not an extension to pay. Any tax the association expects to owe is still due by the original deadline, and interest and penalties on late payment run from that date even if Form 7004 is filed.⁵

Quarterly Estimated Payments

An HOA expecting to owe $500 or more in tax for the year is generally required to make quarterly estimated payments on the standard corporate schedule.⁶ For calendar-year associations in 2026, the deadlines are April 15, June 15, and September 15, 2026, and January 15, 2027. Small associations with modest investment income sometimes overlook this and get hit with an underpayment penalty.

Penalties for Late Filing or Late Payment

The failure-to-file penalty is 5% of the unpaid tax per month or partial month the return is overdue, capped at 25%.⁷ For returns required to be filed in 2026, a return more than 60 days late carries a minimum penalty of $525 or the tax due, whichever is less, no matter how small the actual bill.³

The failure-to-pay penalty is 0.5% of the unpaid tax per month, also capped at 25%, running from the original due date rather than the extended one. When both penalties apply in the same month, the failure-to-file penalty is reduced by the failure-to-pay amount, so the combined charge during the first five months works out to 5% per month rather than 5.5%.⁷ Estimating the tax and paying it by the original deadline avoids both, even if the full return needs more time.

1
Office of the Law Revision Counsel. 26 USC 528 – Certain Homeowners Associations
2
eCFR. 26 CFR 1.528-5 – Source of Income Test
3
Internal Revenue Service. Instructions for Form 1120-H
4
Internal Revenue Service. About Form 1120-H, U.S. Income Tax Return for Homeowners Associations
5
Internal Revenue Service. Instructions for Form 7004 – Section: Extension Period
6
Taxpayer Advocate Service. Your Tax To-Do List: Important Tax Dates
7
Internal Revenue Service. Failure to File Penalty