An important aspect of HOA finances is tax liability. Generally, HOAs are exempt from state and federal income taxes if:
- Most of its HOA units are used by individuals as residences
- It's organized and operated to buy, build, manage, maintain, and care for HOA property
- At least 60% of its gross income for the taxable year comes from HOA membership dues, fees, or assessments
- None of the HOA's net earnings or income goes to any individual, except if it's by a rebate of excess membership dues, fees, or assessments, for example
State and federal law require the HOAs and Condo Assocations to make an election to be treated as a tax-exempt organization. Also, even if the HOA is tax exempt, it must file a federal tax return.
The tax exemption excludes from the HOA's gross income all of the membership dues, fees, or assessments collected by the HOA. In addition, the HOA gets an automatic $100 deduction on its gross income. Essentially, then, a tax-exempt HOA is taxed only on its investment income, if it has any, and any other income it might have, such as from renting out a recreational facility to non-member/owners, less the $100 deduction.
