Are Home Owner’s Associations Exempt from Income Tax?

Section 501(c)(3) of the Internal Revenue Code (IRC) sets forth requirements that an organization must meet in order to be exempt from income tax. While the IRS recognizes more than 30 types of nonprofit organizations, only certain organizations qualify as 501(c)(3) organizations to which tax-deductible contributions can be made.

In general, organizations that may be eligible for Section 501(c)(3) status are charitable organizations, churches, religious organizations, and private foundations. To be considered a charitable organization by the IRS, an organization must operate exclusively for one of these purposes: charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals.

Organizations that meet the 501(c)(3) tax category requirements can be classified into two categories: public charities and private foundations. The main distinction between these two categories is how they get their financial support. A public charity is a nonprofit organization that receives a substantial portion of its income or revenue from the general public or the government. At least one-third of its income must be received from the donations of the general public. A private foundation is typically held by an individual, family, or corporation, and obtains most of its income from a small group of donors. Private foundations are subject to stricter rules and reporting requirements than public charities.

It is difficult for a property owner’s association to meet the requirements of a Section 501(c)(3) organization. However, they may be eligible for exempt status under IRC Section 501(c)(4). However, contributions to a Section 501(c)(4) organization are not tax deductible.

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 may be exempt as a social welfare organization if 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.  There is no precise definition of a community.  Rather, whether an area is a community depends on the facts and circumstances of the particular situation.  Even if an area represented by an association is not a community, the association can still qualify for exemption if its activities benefit a community.

To become a 501(c)(4) organization, you must prove your association’s main goal is to promote the social welfare of the community. However, doing so may require amending your association’s governing documents. To be tax-exempt as a social welfare organization described in Section 501(c)(4), an organization must not be organized for profit and must be operated exclusively to promote social welfare. The earnings of a section 501(c)(4) organization may not inure to the benefit of any private shareholder or individual.

Let us know if we can help you with these and other tax questions related to your homeowners association.