Is Section 528 an automatic tax exemption for HOAs?

No. Section 528 is an optional, elective regime. An association that does not affirmatively qualify for it and elect it each year is taxed as an ordinary corporation.

Do we have to file Form 1120-H every year once we start?

No. The election is made fresh each year. A qualifying association can switch between Form 1120-H and Form 1120 from year to year depending on which produces less tax.

Does electing Section 528 mean our HOA owes no tax at all?

No. It excludes only exempt function income, membership dues and assessments tied to ownership. Everything else, including interest and nonmember income, is still taxed, at a flat 30% rate for most associations.

Federal income tax basicsLesson 3 of 26

Academy/Taxes, Audits & Financial Compliance

Section 528 basics

The federal tax code section that decides how, not whether, your association pays tax.

Section 528 is the part of the federal tax code that lets a qualifying homeowners association exclude its membership dues and assessments from taxable income. It only applies if the association elects it, every year, by filing Form 1120-H. Without a valid election, the association is simply a taxable corporation, filing Form 1120 like any other business.

There is no automatic HOA tax exemption

Many boards assume that because their association is a nonprofit corporation, it owes no federal income tax. Incorporating as a nonprofit is a state law status. It does not, by itself, create federal tax exemption. Federal law taxes an association only to the extent Section 528 says so, and an association that does not affirmatively qualify for, and elect, that treatment is simply an ordinary taxable corporation.

"A homeowners association shall be subject to taxation under this subtitle only to the extent provided in this section."

Source: 26 U.S.C. Section 528, Legal Information Institute, Cornell Law School

Who qualifies, and what income it covers

Section 528 treatment is available to condominium associations, residential real estate management associations, and timeshare associations that meet income and expense tests. The part it excludes is exempt function income: dues, fees, or assessments where a member's liability comes solely from owning property in the association, not from using a specific facility. A flat monthly assessment qualifies. A fee that changes based on how much a member uses the pool or clubhouse generally does not, no matter what the ledger calls it.

The election is made fresh every year

Filing Form 1120-H is not a permanent status. It is an annual election, made by filing that form on time for the year in question. A board that elected it last year is not locked in, and a board that filed the regular Form 1120 last year is not barred from electing 1120-H this year. Nothing about the election is mandatory: a qualifying association can always file Form 1120 instead, in any year the numbers favor it.

Electing trades a narrower tax base for a higher rate

Form 1120-H excludes exempt function income, but taxes what's left at a flat rate well above the regular corporate rate, and blocks two things a normal corporation gets: a full range of deductions and the ability to carry a loss year forward. Form 1120 taxes everything, including membership dues, but at the lower flat corporate rate with normal corporate mechanics available. Which form owes less tax is a computation done each year, not a default.

"The taxable income of a homeowners association that files its tax return on Form 1120-H is taxed at a flat rate of 30% for condominium management associations and residential real estate management associations. The tax rate for timeshare associations is 32%."

Source: Instructions for Form 1120-H (2025), IRS

Section 528 is purely a federal income tax choice. It has no bearing on whether your association owes state income tax, sales or use tax, or must maintain a registered agent in good standing, confirm each of those separately with a CPA licensed in your state.

Check yourself

Answer before you read the explanation, recalling it is what makes it stick.

Your HOA has filed Form 1120-H for the past six years. This year the board wants to file Form 1120 instead because it will owe less tax. Can they?

A board member says, "We're a nonprofit corporation, so we don't owe federal income tax." What's wrong with that statement?

A board wants to know which form to file this year. What actually determines whether Form 1120-H or Form 1120 produces less tax?

Sources

Instructions for Form 1120-H (2025), IRS
26 U.S.C. Section 528, Certain Homeowners Associations, Legal Information Institute, Cornell Law School

Related elsewhere in the Academy

Taxes, Audits & Financial Compliance

Ready to see what filing Form 1120-H actually looks like? Walk through it here.

Whether your state separately taxes association income, and how a specific fee or charge gets classified under the income and expense tests, varies by state and by year. Confirm both with a CPA before relying on either.

Not legal advice

totalHOA Academy is intended to provide general educational information and a practical starting point for understanding community association governance and operations. While we aim to provide useful and accurate information, we do not guarantee that every article is complete, current, or applicable to your specific association or situation.

Nothing in the Academy should be considered legal, financial, tax, accounting, or other professional advice. Laws vary by state, and your association's declaration, CC&Rs, bylaws, rules, policies, and other governing documents may impose different requirements.

Use the information in the Academy at your own discretion. Before making decisions that affect your association, its owners, finances, legal rights, or obligations, review your governing documents and consult an attorney, accountant, or other qualified professional when appropriate.