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The Dos and Don'ts When it Comes to HOA Taxes

Understanding HOA taxes is important for the association's success. Read here to learn some of the dos and don'ts when it comes to HOA taxes.
Katie Vaughan | Apr 10, 2024 | 6 min read
note book that says do and don't

As the tax season is fast approaching, ensuring that you settle your homeowner's association taxes is your primary focal point. As a board member, you should tackle your association's taxes, among other financial management roles.

Taking care of your association's taxes helps improve its financial stability by avoiding extra penalty costs. The problem is that HOA taxes can be more complicated and confusing.

Therefore, when it comes to your HOA taxes, you'll have many questions on how your HOA can adhere to the tax requirements. So let's help you understand what you can and cannot do when handling your HOA's taxes.

Do: Always File Your HOA's Taxes

As per the federal government, HOAs are businesses required to pay taxes. Even though HOAs can be non-profit, they have to pay taxes to the IRS. Ask the person who handles your HOA's financial management services to ensure you file the correct tax returns. Filing taxes is mandatory. Thus, you should ensure that you file your HOA taxes even if you do not owe any tax.

Don't: Make Assumptions

You might sometimes confuse your HOA for being a non-profit organization and assume it got exempted from paying taxes. Unfortunately, this is not the case. If your HOA wants to get tax exemptions from the IRS, you need to prove that it maintains no privately-owned homes except for land open to the general public. Due to these reasons, it is rare for an HOA to be exempt from paying taxes, even if classified as a non-profit.

Do: File Your Taxes on Time

You should know when your taxes are due so that you file them early enough. The deadline for filing your taxes depends on your fiscal year. You must file your community tax returns before the 15th day of the fourth month after the end of your association's tax year. For example, if your fiscal end date is December 31, you'll file your returns before April 15. If it ends on June 30, you will have to file before the mid of the third month (September). You should check with the IRS to ensure that you settle your HOA's tax filing requirements before the deadline.

Don't: Delay Filing Your Taxes

Since HOA taxes are not that complex, there is no need to delay the filing. Even though your HOA might encounter several problems that might cause a delay, earlier preparations help prevent this. Failing to file your returns is more costly — you will have to pay penalties and interests accumulated on the missed taxes. If your HOA is in a financial crisis that you cannot file your tax returns, you can request an allowance of around six more months. However, through proper HOA management, you can avoid such scenarios.

Do: Hire an Experienced HOA Bookkeeper 

Your homeowner's association should not hire just any bookkeeper. You should ensure that you find a CPA who is familiar with Homeowners Associations to ensure that they correctly file your returns on time. Having a competent financial manager to handle your HOA's taxes will save you money, time, and energy. They are also reliable when providing financial advice, including the required IRS forms for your HOA and other tax-related information.

Don't: Do it Alone

Even though your HOA's treasurer takes care of financial-related activities of your HOA, it is best to relieve them of tax filing duties. They can prepare and file the HOA's taxes, but that has inconveniences. When your treasurer is busy dealing with the association's funds and maintaining all financial records, they might forget about filing taxes. Therefore, having a CPA handle your HOA's tax-related matters is more convenient. HOA taxes are pretty complicated and need more expertise.

Do: Fill Out the Correct IRS Forms

Depending on your HOA, you'll file either Form 1120 or Form 1120-H. Form 1120, the US Corporation Income Tax Return form, is quite time-consuming. Corporations file it to determine their income tax liability alongside their losses, profits, and eligible IRS deductions.

On the other hand, Form 1120-H is more straightforward and less tedious. Since it got designed for HOAs, it has its own benefits. An HOA can exclude exempt-function income like dues and fees from its gross income with this form. That ensures that your HOA only pays taxes on non-exempt income, reducing its tax expenses. You can experiment with the two documents to ensure that you choose one that significantly reduces your taxes.

Don't: Assume That Your State Lacks Tax Filing Forms

Depending on which state your HOA is in, the tax filing requirements can be complex or straightforward. Some states lack specific requirements on tax returns, while others have. You should check with your state to ensure that you meet these requirements and file accordingly.

Need Help Handling Your HOA Duties

Taking care of your HOA tax requirements is among the many complex things that you are required to handle. You should have an effective plan to ensure you file your taxes on time and run your HOA smoothly. At RealManage, we understand that you have too much on your plate. Trying to have your taxes filed early, preparing a budget, managing your expenses, and ensuring your HOA performs its duties are too many responsibilities for you.

Request a proposal and let us relieve you of these heavy HOA management duties. Let the experts help your HOA achieve its goals!

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