Academy/Taxes, Audits & Financial Compliance
State tax returns
Filing your federal HOA return correctly says nothing about what your state expects.
Filing Form 1120-H with the IRS says nothing about what your state expects. State income tax treatment of homeowners associations varies widely, and most states have no equivalent to Section 528. An association that has filed federal returns correctly for years can still be delinquent on state filings. Confirm your state's rules with a CPA licensed there.
Two systems, not one
The IRS taxes your association under Internal Revenue Code Section 528, whether it elects Form 1120-H or files the regular Form 1120. That election is federal only. States run their own, separate corporate and income tax systems, and nothing in Section 528 tells a state what to do.
"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, Certain Homeowners Associations, Legal Information Institute, Cornell Law School
Whether your state taxes association income, what form it uses, and whether it has anything resembling the Section 528 exemption for exempt function income varies by state. Check with a CPA licensed in your state before assuming either a bill or a pass.
Why a clean federal record does not guarantee a clean state one
A board that has filed Form 1120-H correctly for a decade can still be delinquent on state filings, because federal income tax, state income tax, and state corporate-law compliance like registered agents and annual reports are independently governed. Getting one right says nothing about the others.
Some states have their own version of the exempt-function-income carveout; many do not, and treat an association like any other corporation reporting all of its income. Whether an association's assessment income is taxed, partly taxed, or untaxed at the state level depends entirely on that state's statute.
What to actually check
Ask the association's CPA, licensed in your state, three things: does the state tax corporate income at all, does it recognize anything like exempt function income, and is a return due even in a year the association owes nothing federally.
If the association does not currently have a CPA who works with associations in your state, that is the first gap to close. While you are at it, confirm the association's registered agent is current and its state annual report is filed. These are separate obligations from tax returns, but missed just as often, for the same reason: nobody assigned to check them.
Check yourself
Answer before you read the explanation, recalling it is what makes it stick.
Your association has filed Form 1120-H correctly with the IRS for six straight years. What does this tell you about your state income tax obligations?
A board member says the association owes no state tax because it filed Form 1120-H federally. What should the board actually check?
Which of these is true about state income tax for homeowners associations?
Sources
- 26 U.S.C. Section 528, Certain Homeowners Associations, Legal Information Institute, Cornell Law School
- Instructions for Form 1120-H (2025), IRS
Taxes, Audits & Financial Compliance
Next, learn what the Section 528 election actually requires: Section 528 basics.
Whether your state taxes association income, what form it would use, and whether it has anything resembling Section 528's exempt function income carveout all vary by state and by your association's own facts.