HOA Tax Return: Form 1120-H Filing Guide

HOA Tax Return: The Practitioner’s Guide to Filing Form 1120-H 

If you handle tax compliance for a homeowners association, you already know the confusion runs deep. Board treasurers hand you a shoebox of bank statements. The prior preparer filed a regular corporate return when they should not have. And the IRS instructions, while thorough, do not address the gray areas you actually encounter at your desk.

This guide breaks down how HOA tax returns work from a practitioner’s perspective — pulling in real-life scenarios that enrolled agents and CPAs deal with regularly, along with the technical framework you need to stay compliant.

Do HOAs File Tax Returns?

Yes. Despite operating as nonprofit-style organizations that collect dues for communal benefit, homeowners' associations are required to file a federal income tax return every year. There is no automatic exemption simply because the HOA exists to manage a neighborhood.

• Form 1120-H (U.S. Income Tax Return for Homeowners Associations) — available under IRC Section 528
• Form 1120 (U.S. Corporation Income Tax Return) — the standard corporate return

The option between these two forms is not permanent. The enrolled agent or preparer advising the HOA makes this election annually, and the IRS expects you to compare both outcomes and select whichever produces the lower tax liability. 

Form 1120-H vs. Form 1120: Which Should Your HOA File?

This is the core decision, and it trips up more preparers than you might expect. In practitioner forums, one of the most frequently raised scenarios involves associations that were incorrectly filed on Form 1120 for years when 1120-H would have saved thousands in taxes.

• Exempt function income (dues, assessments) is excluded from gross income.
• Flat 30% tax rate applied only to non-exempt income (32% for timeshare associations)
• $100 specific deduction available
• Simpler computation overall

• Access to graduated corporate tax rates
• Broader range of deductions
• Useful when non-exempt income is high, and expenses are considerable

The general rule: if your HOA’s income is primarily from member assessments and dues, Form 1120-H will almost always result in lower (or zero) tax. The 1120 route typically only makes sense when the association has significant non-member revenue streams.

If you are considering becoming an enrolled agent or have just passed the EA exam, understanding this election is a core competency for entity taxation practice.

The Three Qualification Tests for Form 1120-H

Before filing on Form 1120-H, the HOA must satisfy three tests. Fail any one of them, and you default to Form 1120 for that year.

1. The Residential Use Test (85%)

At least 85% of the total square footage of lots or units within the HOA must be used for residential purposes. Commercial HOAs or mixed-use developments with heavy retail components may not qualify.

2. The Income Test (60%)

A minimum of 60% of the HOA’s gross income must be “exempt function income.” This term has a specific definition under Section 528 — it means income from membership dues, fees, or assessments paid by unit owners in their capacity as owner-members.

• Interest or dividend income from reserve accounts
• Rental income from non-members using the clubhouse
• Cell tower lease payments
• Pool or amenity day-pass fees from non-residents

3. The Expenditure Test (90%)

At least 90% of the HOA’s annual expenditures must go toward acquiring, constructing, managing, maintaining, or caring for association property.

This test generates some of the most nuanced questions in practice. One scenario that surfaces regularly among tax practitioners involves HOAs that paid federal taxes and penalties in a prior year — do those payments count in the 90% expenditure calculation?

The analysis comes down to the numerator vs. the denominator. Qualifying expenditures (the numerator) are narrowly defined as spending on association property. Taxes and IRS penalties would not qualify for that numerator. However, they likely must be included in total expenditures (the denominator). This distinction can actually cause an HOA to fail the 90% test, forcing a Form 1120 filing.

If your EA exam preparation covered Section 528, you will recall this concept from the Businesses domain. But the real-life application is where most practitioners need additional guidance.

What Counts as Exempt Function Income?

Getting this classification right is essential for passing the 60% income test. Here is the breakdown:

• Routine assessments and monthly dues
• Special assessments for capital projects (roof replacement, repainting)
• Late fees and fines are charged to owners as owner-members

• Bank interest and dividends on reserve funds
• Rental income from facilities used by non-members
• Income from laundry machines, vending, or parking fees from outside users
• Cell tower or billboard lease revenue
• Capital gains from investment sales

The taxable income on Form 1120-H is calculated only on the non-exempt portion, minus allocable expenses and the $100 specific deduction, then taxed at the flat 30% rate.

Common Filing Mistakes and Real-World Practitioner Issues

Mistake 1: Filing 1120 When 1120-H Was Available

This is far more common than it should be. Practitioners in professional communities report inheriting HOA clients where the prior preparer filed Form 1120 for years, sometimes resulting in thousands of dollars in unnecessary tax. One scenario involved an HOA with just $211 in interest income and no other non-exempt revenue, yet it was filed on Form 1120 simply because the previous preparer did not evaluate the 1120-H option.

The costly catch: switching back from 1120 to 1120-H for prior years is not straightforward. The Section 528 election must generally be made by the due date (including extensions) of the return. For prior years whose deadlines have passed, the only path to relief may be a Private Letter Ruling under Reg. § 301.9100-3, which carries user fees starting at $3,450 for small taxpayers and can reach $14,500.

Mistake 2: Misunderstanding the Expenditure Test

The 90% expenditure test looks simple on paper, but creates real headaches when the HOA has unusual expenses. As noted above, items such as IRS tax payments, penalties, legal settlement costs, or political contributions may fall outside the definition of qualifying expenditures but still count toward total expenditures.

Always run the numbers both ways before filing. If a non-qualifying expense pushes the HOA below the 90% threshold, the association loses eligibility for Form 1120-H that year.

Mistake 3: Missing the Election Deadline

The Form 1120-H election must be made annually by the filing deadline, including extensions. For calendar-year HOAs, this means the return must be filed by April 15 (or October 15 with a valid extension). Miss the deadline, and the association must file Form 1120 for that year.

For the current tax year, Reg. § 301.9100-2(b) provides an automatic 6-month extension window to make the election. But for older years, you need the PLR route — which is both expensive and time-consuming.

Are HOA Tax Returns Public?

This is a surprisingly common question — and the keyword “are HOA tax returns public” carries consistent search volume.

• If the HOA files Form 1120-H or 1120, these are corporate returns and are not public records. The IRS does not make them available to homeowners or the general public.
• If the HOA holds tax-exempt status under 501©(4) or 501©(7) and files Form 990, that return is publicly available through the IRS or databases like GuideStar.
• State laws vary. Some states require HOAs to share financial statements or audit reports with members upon request, but this is different from disclosing the actual tax return.

Board members sometimes confuse the annual financial audit (which may be shared with homeowners under state association laws) with the federal tax return itself. If you are advising an HOA board, clarify this distinction early — it prevents unnecessary disputes at annual meetings.

HOA Tax Return Deadlines and Extensions

The extension is obtained by filing Form 7004 before the first due date. Remember: the extension gives additional time to file, but not to pay. Any estimated tax owed should be remitted by the first deadline in order to avoid interest and penalties.

From 2025 tax year filings, Form 1120-H is now available for electronic filing — a change that streamlines the process for practitioners managing multiple HOA clients.

Understanding entity filing deadlines is a key component of the enrolled agent syllabus, particularly in Part 2 (Businesses) of the Special Enrollment Examination.

Step-by-Step: How to File Form 1120-H

• Step 1: Gather all financial records. Collect bank statements, assessment ledgers, reserve fund statements, rental agreements, and any investment account reports.
• Step 2: Classify all income. Separate exempt function income (dues, assessments, fees from owner-members) from non-exempt income (interest, rental revenue from non-members, cell tower leases, capital gains).
• Step 3: Run the three qualification tests. Calculate the 85% residential use test, the 60% income test, and the 90% expenditure test. Document every calculation in your workpapers — this is your audit defense.
• Step 4: Compute taxable income. Take non-exempt gross income, subtract directly allocable expenses, then subtract the $100 specific deduction.
• Step 5: Apply the flat tax rate. Multiply taxable income by 30% (or 32% for timeshare associations).
• Step 6: Compare against Form 1120. Run the numbers on a regular corporate return as well. The IRS specifically instructs associations to file whichever form produces the lower tax. 
• Step 7: File by the deadline. Submit by the earliest or extended due date to preserve the Section 528 election. A missed deadline means the HOA defaults to Form 1120 for that year.

For those preparing for the EA exam, walking through this process with a practice scenario is one of the most effective ways to reinforce Part 2 entity taxation concepts.

Revenue Ruling 70-604: The Excess Income Strategy

Many HOAs collect more in assessments than they spend in a given year. Without planning, that surplus becomes taxable income. Revenue Ruling 70-604 provides a solution — it allows the association’s members to vote on how to treat the excess:

• Option A: Apply the surplus to the following year’s assessments (deferring tax)
• Option B: Refund the excess directly to members

The member vote must be documented in official meeting minutes, ideally before year-end. This is not a one-time election; it should be addressed at each annual meeting where a surplus exists.

A few practical points that come up regularly in practitioner discussions:

• The election cannot be used to transfer excess income into reserves as a capital contribution — that treatment fails under IRC Section 118 analysis
• If the HOA board missed the vote, you cannot retroactively create the election after year-end.
• The ruling is a significant planning tool, primarily when the HOA files Form 1120; for 1120-H filers, the exempt function income exclusion often makes the surplus issue moot.

When an HOA Should Consider 501©(4) Status Instead

Some associations may qualify for full tax-exempt status under Section 501 (c) (4) as social welfare organizations. This route eliminates income tax on exempt activities entirely but comes with stricter operational constraints:

• The HOA must operate exclusively for community benefit.
• Net earnings cannot benefit any private individual.
• Political activity restrictions apply.
• Form 990 must be filed annually (which is publicly available)
• The application process requires IRS approval.

Most small to mid-size residential HOAs find Form 1120-H simpler and more practical. The 501©(4) path typically makes sense only for larger associations with minimal non-exempt income and a preparedness to accept the disclosure and operational requirements that come with exempt status.

For practitioners weighing this analysis, the CPE requirements for enrolled agents include tax-exempt organization topics — making this a natural area for continuing education.

Practitioner Tips From the Field

1. Always compare both forms. Never assume 1120-H is automatically better. Run the numbers on Form 1120 as well — the IRS expects this comparison. 
2. Document everything for the 90% test. Keep a schedule that ties each expense category to the association property. Include supplier invoices, board resolutions for capital projects, and property descriptions. If the IRS questions eligibility, your workpapers are your primary defense.
3. Watch for the late-election trap. If you take over an HOA client mid-year and the prior preparer missed the filing deadline lacking an extension, your options for that tax year are limited to Form 1120. The PLR route for late relief is expensive and time-consuming.
4. Ask about excess income votes. Rev. Rul. 70-604 elections need to happen at a member meeting before year-end. If the board skipped it, you are working with whatever the financials show.
5. Track non-member income carefully. That clubhouse rental to a wedding planner, the cell tower lease, the interest on the reserve fund — these are all non-exempt and they compound.
6. Review the prior preparer’s work. Multiple Eduyush community discussions involve practitioners inheriting HOA clients where the wrong form was filed for years. Always review historical returns before filing the current year.

Knowing these details is precisely the kind of skill that differentiates an enrolled agent from a basic return preparer.

Frequently Asked Questions

Q1: Can an HOA switch between Form 1120-H and Form 1120 each year?

Yes. The Section 528 election is made separately for each tax year. The IRS specifically instructs associations to compare both forms and file whichever produces the lower tax. There is no lock-in period or multi-year commitment.

Q2: What happens if my HOA client was incorrectly filed on Form 1120 for prior years?

This scenario surfaces regularly in practitioner discussions. If the filing deadline (including extensions) for those prior years has passed, the Section 528 election generally cannot be made retroactively without a Private Letter Ruling under Reg. § 301.9100-3. The IRS user fees range from $3,450 for small taxpayers to $14,500, and the time required to prepare the request is substantial. For the current tax year, an automatic 6-month extension under Reg. § 301.9100-2(b) may still be available. The HOA’s recourse for prior-year losses may include a complaint or malpractice claim against the original preparer.

Q3: Do IRS tax payments and penalties count toward the 90% expenditure test?

This produces substantial discussion among practitioners. The prevailing analysis: taxes and penalties paid to the IRS should be excluded from qualifying expenditures (the numerator) because they do not relate to managing or maintaining association property. However, they likely must be included in total expenditures (the denominator). This distinction can push an HOA below the 90% threshold — ironically, making it ineligible for Form 1120-H in a year when it already paid unnecessary taxes on Form 1120.

Q4: What qualifies as “association property” for the expenditure test?

Association property includes: real and personal property the association holds directly, property that members hold in common (pools, clubhouses, landscaping), property members hold privately within the association’s boundaries, and property owned by a governmental unit that benefits the community’s residents. Capital projects like roof replacements, building re-stuccoing, balcony repairs, and common-area electrical work all qualify — provided you can document they relate to association-managed or common-area property rather than individually owned private units.

Q5: Is the Revenue Ruling 70-604 vote required every year?

The vote should be taken at each annual meeting where the HOA anticipates or has excess member income. It is not a one-time election. The vote must be documented in the official meeting minutes and, ideally, taken before year-end. If the board fails to hold the vote, the excess income remains taxable for that year. Some practitioners include a standing agenda item for this vote as part of their HOA client engagement process. Note that the election cannot be used to transfer excess income into reserves as a capital contribution — that treatment fails under IRC Section 118 analysis.

Q6: Can an HOA file Form 1120-H electronically?

Yes. Recently, the IRS updated Form 1120-H, which is now accepted for electronic filing. This is a significant change for practitioners managing multiple HOA clients, as it streamlines submission and reduces processing wait times compared to paper filing.

Q7: What is the tax rate on Form 1120-H?

Q8: My HOA has a cell tower lease and clubhouse rental income. Can it still file 1120-H?

Yes, as long as the three qualification tests are still met. Cell tower revenue and non-member clubhouse rentals are classified as non-exempt income and will be taxed at the 30% rate. The real question is whether these income streams push the HOA below the 60% exempt function income threshold. Run the calculation: if dues and assessments still constitute 60% or more of total gross income, the 1120-H election is preserved.

Q9: How does an enrolled agent add value for HOA clients compared to a standard preparer?

EAs bring IRS representation authority that basic preparers lack — which matters when HOA returns face scrutiny. They also meet continuing education requirements that keep them current on changes in entity taxation. For HOA boards, hiring an EA means having someone who can advise on the 1120-H vs. 1120 election, manage Rev. Rul. 70-604 planning, and represent the association directly before the IRS without needing a power-of-attorney workaround.

Q10: Can a condo association file Form 1120-H or is it only for traditional HOAs?

Condominium management associations absolutely qualify. Section 528 specifically defines three types of eligible organizations: condominium management associations, residential real estate management associations, and timeshare associations. The same 85/60/90 tests apply. In practice, condo associations often face more complex expenditure test calculations due to shared building systems (elevators, HVAC, plumbing) that serve both common areas and individual units, calling for careful allocation documentation.

Key Takeaway

Filing an HOA tax return correctly is not merely about selecting the right form — it is about comprehending the qualification tests, tracking income classifications, and making the annual election on time. The difference between Form 1120-H and Form 1120 can mean thousands of dollars in tax for an association whose income is predominantly from member assessments.

If you are a tax professional aiming to deepen yourfweb entity taxation expertise, the Enrolled Agent credential covers these concepts comprehensively in Part 2 of the exam. And if you are already credentialed, HOA tax advisory is a niche that continues to grow as more associations seek qualified representation.

For the official IRS instructions and the current Form 1120-H, visit the IRS Form 1120-H page.