Club and Property Owners Association: What it means for tax

Mar 22, 2017
Private clubs Business tax

Organizations looking to file as a homeowners association must meet certain tests and thresholds.  Commercial associations do not qualify to file an 1120-H, however, residential associations do. Common Interest Realty Associations (CIRAs) technically are residential associations; therefore, there is no statue that specifically states the combined club and property owners association (CIRA) cannot file a 1120-H. So if there isn’t any law that states they cannot file an 1120-H, the next consideration is do they have sufficient amounts of exempt function activity to meet the thresholds.

The section 528 states that an organization must have at least 60 percent of the total gross revenue and 90 percent of the expenses classified as an “exempt function” in order to qualify.

A common misconception is that member related means exempt function. The IRS defines exempt function income as membership dues, fees or assessments. Assessments or fees for a common activity qualify, but charges for providing services do not. What is important is that such income be derived from owners of residential units or residential lots in their capacity as owner-members rather than in some other capacity such as customers for services. For example, charges for golf activity and food and beverage services are not considered exempt function income, while assessments to maintain the common area do.

The IRS defines exempt expenses as to acquire, build, manage, maintain, or care for its property. Certain types of expenses of a combined club and property owners associations related to the amenities, and therefore do not qualify as exempt function expense.

The exempt revenue test of 60 percent has a larger threshold and when we have calculated the exempt function revenue, we find that some CIRAs do meet this test. However, the exempt function expense threshold is very high and we find most CIRAs do not meet the 90 percent test.  Without meeting both tests, the organization cannot file a form 1120-H.

If your organization hasn’t done so in several years, it might be time for you to review the structure, revenue, and expenses with your accountant to make sure you are filing correctly.

RSM contributors

  • Frank Lucas
Private clubs Business tax