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voluntary homeowners association

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zephyrus

Member
What is the name of your state? Nevada.

We have a voluntary HOA where there is no income other than voluntary dues and that there is no common property owned and/or maintained by the association.
In addition, it doesn't engage in exterior maintenance of private homes. It does enforce covenants to preserve the appearance of the development and it is operated for the benefit of all the residents of the community.

We recently consulted an accountant who claims that we cannot obtain tax exempt status under 501(a), specifically as a 501(c)(4). He states:
“...Homeowner's associations are not Non-profit organizations as defined under IRS statutes. Social and Welfare organizations under 501(c)(4) are not the same as homeowner's associations, these are often programs designed at helping needy families and children. Currently, Homeowner's associations are registered with the IRS as a corporation and file an 1120-H tax return in order to be exempt from tax with the IRS. “ This appears to disagree with Publication 557, which lists Homeowner's associations as an example. Who is right?
 


FlyingRon

Senior Member
Correct, a HOA doesn't meet any of the requirements for a nonprofit as far as the IRS is concerned. You are not a social welfare organization. You exist for the private benefit of the association members.
 

zephyrus

Member
Publication 557 (p. 47) describes examples of a 501 (c)(4) organization. One example is a homeowner's associations such as ours and we appear to satisfy all the requirements that they list.
 

zephyrus

Member
Form 1120-H appears to be aimed at the more traditional HOA that has at least some taxable income, which we do not. The instructions spell out 3 specific types of applicable associations: a condominium management association, a residential real estate management association and a timeshare association. None of these apply to us.
 

LdiJ

Senior Member
What is the name of your state? Nevada.

We have a voluntary HOA where there is no income other than voluntary dues and that there is no common property owned and/or maintained by the association.
In addition, it doesn't engage in exterior maintenance of private homes. It does enforce covenants to preserve the appearance of the development and it is operated for the benefit of all the residents of the community.

We recently consulted an accountant who claims that we cannot obtain tax exempt status under 501(a), specifically as a 501(c)(4). He states:
“...Homeowner's associations are not Non-profit organizations as defined under IRS statutes. Social and Welfare organizations under 501(c)(4) are not the same as homeowner's associations, these are often programs designed at helping needy families and children. Currently, Homeowner's associations are registered with the IRS as a corporation and file an 1120-H tax return in order to be exempt from tax with the IRS. “ This appears to disagree with Publication 557, which lists Homeowner's associations as an example. Who is right?
I have several HOAs as clients and they all file 1120-Hs
 

PayrollHRGuy

Senior Member
Just for the discussion here is the verbiage of Pub. 557 @zephyrus is talking about.

Homeowners' associations. A membership organization formed by a real estate developer to own and maintain common green areas, streets, and sidewalks and to enforce cove- nants to preserve the appearance of the devel- opment should show that it is operated for the benefit of all the residents of the community. The term community generally refers to a geo- graphical unit recognizable as a governmental subdivision, unit, or district thereof. Whether a particular association meets the requirement of benefiting a community depends on the facts and circumstances of each case. Even if an area represented by an association isn't a com- munity, the association can still qualify for ex- emption if its activities benefit a community.

The association should submit evidence that areas such as roadways and park land that it owns and maintains are open to the general public and not just its own members. It also must show that it doesn't engage in exterior maintenance of private homes.

A homeowners' association that isn't exempt under section 501(c)(4) and that is a condomin- ium management association, a residential real estate management association, or a timeshare association generally can elect under the provi- sions of section 528 to receive certain tax bene- fits that, in effect, permit it to exclude its exempt function income from its gross income.
 

Taxing Matters

Overtaxed Member
Who is right?
In your case, the accountant is correct. Read what Pub 557 says very carefully. It describes an HOA that qualifies for exemption under 501(c)(4) as follows:

A membership organization formed by a real estate developer to own and maintain common green areas, streets, and sidewalks and to enforce covenants to preserve the appearance of the development should show that it is operated for the benefit of all the residents of the community. The term community generally refers to a geographical unit recognizable as a governmental subdivision, unit, or district thereof....
The association should submit evidence that areas such as roadways and park land that it owns and maintains are open to the general public and not just its own members. It also must show that it doesn't engage in exterior maintenance of private homes.
The key features of an HOA that qualifies for exemption under (c)(4) then are that it owns common areas like streets, sidewalks, etc., that are open to the general community (i.e. all the members of the city in which the HOA is located) and maintained for the benefit of that community and that it does not spend its money for the private benefit of just the members, like paying to maintain the exteriors of their homes.

So if I created a HOA that was located in Denver Colorado I would have to show that the HOA owns the common areas of the property in that HOA, that those common areas are open to all the residents of Denver to use (e.g. not a gated community open only to residents of the HOA), and that the HOA maintains those common areas for the benefit of all of Denver, not just the benefit of the members. I would also need to show that HOA is not spending money for the private benefit of the members, like paying to maintain their private property.

If all your HOA does is enforce the covenants of your voluntary association as to appearance and condition of member's property that does not benefit the public — the members of the community in which the HOA is located. It simply benefits the members of the HOA, and that is not good enough for exemption.

 

FlyingRon

Senior Member
Again, in order to qualify for a social welfare organization, you have to show that that the organization provides NO PRIVATE BENEFIT. Most HOAs DO NOT QUALIFY because they provide services or support that is only available to their members. If anything you do is not available to the public at large, then you're not going to qualify.
 

zephyrus

Member
We have no common green areas and sidewalks , provide no services and are not gated. We do not engage in exterior maintenance of private homes. All streets are public access. All money is spent only on items like water quality testing that only benefits the whole community. It's hard for me to imagine that Pub 557 would list homeowner's associations as an example if it is really hard for an HOA to qualify.

In the end, I suspect that the only way to determine whether we qualify is to submit a 1024a (Application for Recognition of Exemption Under Section 501(c)(4) of the Internal Revenue Code)
 

zephyrus

Member
If, in fact, we are not a 501(c)(4), given the restrictions (see above) for filing under 1120-H (i.e. we do not appear to qualify), how do we file?
 

Zigner

Senior Member, Non-Attorney
We have no common green areas and sidewalks , provide no services and are not gated. We do not engage in exterior maintenance of private homes. All streets are public access. All money is spent only on items like water quality testing that only benefits the whole community. It's hard for me to imagine that Pub 557 would list homeowner's associations as an example if it is really hard for an HOA to qualify.

In the end, I suspect that the only way to determine whether we qualify is to submit a 1024a (Application for Recognition of Exemption Under Section 501(c)(4) of the Internal Revenue Code)
Best of luck - but you're really just spinning your wheels if you do that. I understand that you WANT it to qualify, but that is causing you to totally ignore the fact that your association is set up to only benefit the members of the association. THAT is what disqualifies you.
 

Taxing Matters

Overtaxed Member
We have no common green areas and sidewalks , provide no services and are not gated. We do not engage in exterior maintenance of private homes. All streets are public access. All money is spent only on items like water quality testing that only benefits the whole community. It's hard for me to imagine that Pub 557 would list homeowner's associations as an example if it is really hard for an HOA to qualify.
That water testing benefits the members of the HOA, but is not benefiting the members of the wider community (i.e. the general public of the city/township/county in which the HOA is located). And I expect that the other expenses similarly only benefit HOA members. That will not get the HOA approved for exemption. The publication lists HOAs in there because some HOAs do in fact qualify for exemption. Most don't, but there are some that do.

In the end, I suspect that the only way to determine whether we qualify is to submit a 1024a (Application for Recognition of Exemption Under Section 501(c)(4) of the Internal Revenue Code)
That's the best way to find out. But just from what you have said here, I expect that your application will be denied. I recommend consulting a tax attorney who practices in the area of exempt organizations for advice on this and, if he or she thinks you have a decent shot to succeed, help you prepare the request for exemption. It goes much more smoothly that way.
 

Taxing Matters

Overtaxed Member
If, in fact, we are not a 501(c)(4), given the restrictions (see above) for filing under 1120-H (i.e. we do not appear to qualify), how do we file?
Then if your organization is organized as a corporation you file Form 1120 if it is a C corporation or Form 1120-S if it is a S-corporation.
 

zephyrus

Member
Best of luck - but you're really just spinning your wheels if you do that. I understand that you WANT it to qualify, but that is causing you to totally ignore the fact that your association is set up to only benefit the members of the association. THAT is what disqualifies you.
Can you give an example of something that we might do that makes us "set up to only benefit the members of the association"? All of the examples people listed above do not apply. I am not set on a 501(c)(4) but it appears that there is no alternative (see above).
 
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