Part 1: Understanding How Condominium and Homeowners Associations Are Taxed

Income taxes can be a confusing topic for association boards.  In this three-part blog series, we’ll provide an overview of association taxation and take a closer look at each federal filing option.  In Virginia, the vast majority of associations are formed as nonstock corporations. As nonstock corporations, they are required to file annual federal income tax returns. Fortunately, through the choice of filing method and applicable IRS regulations, associations can significantly limit their income tax burden.

The Big Picture

In general:

• Member assessments are usually not taxed (depending on the form filed or by applying available exclusions).
• Ancillary income from members may or may not be taxed (depending on the form filed).
• Income from nonmembers is generally taxable. 
   

Associations typically file one of two federal income tax returns:

• Form 1120-H – U.S. Income Tax Return for Homeowners Associations
• Form 1120 – U.S. Corporation Income Tax Return
   

Associations must file annually, even if no tax is owed. Both returns are due on April 15 (for calendar-year associations). The filing method can be changed from year to year, and choosing the correct method can significantly impact the association’s tax liability.

Understanding the basics of association income tax helps boards make informed financial decisions and avoid surprises. In Parts 2 and 3 of this series, we’ll break down the two filing options and explain how each works.