IRS Section 528 Requirements for Homeowners Associations

To qualify under IRS Section 528, a homeowners association must pass four annual tests, meet a residential-use requirement, and make the election each year by filing Form 1120-H on time. The election is not automatic and it is not permanent. It has to be earned every tax year, and missing any one of the requirements pushes the association back onto the standard corporate return, where member assessments become fully taxable.¹

Section 528 covers three kinds of organizations: condominium management associations, residential real estate management associations, and timeshare associations. The association must be organized primarily to manage and maintain shared property. That structural piece is the starting point; the four substantive tests below are what the association has to clear year after year.¹

The Four Annual Qualification Tests

60 Percent of Gross Income From Members

At least 60 percent of the association’s gross income for the year must come from membership dues, fees, or assessments collected from unit or lot owners. That income has to be collected to fund the association’s property management and maintenance work. Bank interest, facility rentals paid by non-members, and vending or laundry revenue do not count toward the 60 percent. If outside income grows large enough to push member-source income below the threshold, the association fails the test for that year.¹

90 Percent of Expenditures on Association Property

At least 90 percent of what the association spends during the year has to go toward managing, maintaining, or improving association property. Routine maintenance, utilities, insurance premiums, and contributions to capital reserve funds all qualify. Spending on political activity, unrelated business ventures, or anything disconnected from the shared property does not.¹

Association Property Test

The property being managed must be owned either by the association itself or by its members, and it has to benefit the membership. Swimming pools, clubhouses, parks, private roads, and shared landscaping are typical examples. The test keeps Section 528 aimed at organizations that maintain property serving the same people who fund it.

No Private Inurement

No part of the association’s net earnings can benefit any private individual. The statute allows only two exceptions: spending on association property, and rebating excess dues to members. Outside those two, board members, officers, and individual homeowners cannot receive a personal financial benefit from the association’s income.¹

The Residential Use Requirement

Section 528 draws a line around residential communities. A condominium management association qualifies only if substantially all of its units are used as residences. 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

The statute uses the phrase “substantially all” without pinning it to a specific percentage. That leaves some ambiguity for mixed-use developments. A property with a small number of commercial units in an otherwise residential building can likely still qualify, but one with a significant commercial component runs a real risk of failing. Associations in mixed-use buildings should work through the analysis with a tax advisor.

Making the Election: Form 1120-H

The Section 528 election is not automatic. The association makes it by filing Form 1120-H, titled “U.S. Income Tax Return for Homeowners Associations.”² Completing and submitting the form by the deadline is the election. There is no separate application and no pre-approval.

The election is made year by year. An association can file Form 1120-H one year and the standard Form 1120 the next if that produces a better result. The choice should be reviewed each year against the actual income mix.

For calendar-year associations, the return is due April 15. More generally, it 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 file by the 15th day of the third month after year-end. An automatic six-month extension is available by filing Form 7004 before the original due date.³

Missing the deadline is where associations get hurt. The association defaults to standard corporate taxation under Form 1120, and every dollar of net income becomes taxable at the regular corporate rate, including member assessments that would otherwise have been exempt. The association also has to file Form 1120-H every year it wants Section 528 treatment, even in a year with zero taxable income. Skipping the return because nothing is owed means the election was never made, and the IRS treats the organization as a regular corporation for that year.

What Section 528 Actually Buys You

The payoff for qualifying 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.⁴

Regular monthly assessments covering landscaping, utilities, and common-area repairs fall into this category. So do special assessments for capital projects like roof replacements or repaving. The label on the payment is not what matters. What matters is that the money comes from owners in their capacity as members, not as customers buying a specific service.⁴

That member-versus-customer distinction is where classification gets tricky. A homeowner’s regular monthly assessment is exempt function income because paying it is a condition of ownership. But if the same homeowner pays a fee to rent the clubhouse for a party, that fee is not exempt function income. It was paid as a customer for a specific service. Non-exempt income like this, along with interest on bank accounts and reserves and rental fees from outsiders, remains taxable on Form 1120-H at a flat 30 percent for condominium and residential associations and 32 percent for timeshare associations, after subtracting directly related expenses and a $100 specific deduction.²

Recordkeeping the Tests Require

The 60-percent and 90-percent tests are not one-time hurdles. The association has to prove compliance every year, which means the books have to cleanly separate exempt function income from non-exempt income and track expenditures by category. Weak records do not just create audit headaches; they can knock out the Section 528 election and push the association onto Form 1120 for that year.

The hardest piece is allocating shared expenses. General administrative costs, management salaries, and office supplies serve both the exempt function and any non-exempt activities. Those costs have to be divided using a reasonable, consistent method. Logging manager hours between rental operations and common-area management is one defensible approach. A revenue-based percentage is another. Whatever method the association picks, it needs to be applied the same way year after year.

When Form 1120 Might Beat Form 1120-H

Qualifying under Section 528 does not always mean filing under Section 528. The 30-percent flat rate on Form 1120-H is higher than the 21-percent standard corporate rate on Form 1120. For an association with significant non-exempt income and modest member assessments, the lower corporate rate can produce a smaller total tax bill even though assessments lose their exempt status on that form.

The tradeoff is straightforward: does the tax saved by shielding assessments under 1120-H outweigh the higher rate applied to everything else? When non-exempt income is small relative to assessments, Form 1120-H almost always wins. When the association has substantial interest or rental income, or large deductible expenses that would offset assessment income on Form 1120, the math can flip. Form 1120 filers can also carry net operating losses forward, which Form 1120-H filers cannot. Running the numbers both ways each year is the only reliable way to know which form serves the association better.

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