Form 1120-H Instructions for HOA Treasurers: How to File Your Association's Tax Return (2026 Tax Year)
An HOA or condominium association that meets three tests — 60% of gross income from owner assessments, 90% of expenditures on association property, and substantially all of its units or lots residential — may elect to file Form 1120-H for the year, and it makes that election simply by filing the form on time. Assessment income is then not taxed at all. Everything else — interest on the reserve account, rent from a cell tower, fees from non-members — is taxed at a flat 30% after a $100 specific deduction. The return is due the 15th day of the 4th month after the end of the tax year (April 15 for a calendar-year association), with an automatic extension on Form 7004.
For most small associations that means the entire federal tax bill is 30% of the interest the reserve account earned. The risk here is not the tax. It is the missed election.
This is general tax information, not tax advice for your association. Your facts, and your state, may change the answer.
Which version of the form to use
Everything below is read off the 2025 Form 1120-H and its instructions, the current revision on IRS.gov — the form is stamped “Created 4/16/25,” the instructions page last reviewed April 30, 2026. The IRS normally posts the next year’s revision in December or January, and the substance rarely moves; check About Form 1120-H and use the revision matching your tax year.
Who can file Form 1120-H
Section 528 covers “a condominium management association, a residential real estate management association, or a timeshare association” that is “organized and operated to provide for the acquisition, construction, management, maintenance, and care of association property” (26 U.S.C. §528©(1), ©(1)(A)) — and that clears the three arithmetic tests below.
A fourth condition sits alongside them, met without thinking by almost every association: “no part of the net earnings of such organization inures… to the benefit of any private shareholder or individual” (§528©(1)(D)). The parenthetical expressly excepts “a rebate of excess membership dues, fees, or assessments,” so returning a surplus to owners does not break the test. Paying a board member for something other than services rendered does.
The 60% gross income test — §528©(1)(B)
“60 percent or more of the gross income of such organization for the taxable year consists solely of amounts received as membership dues, fees, or assessments from— (i) owners of residential units in the case of a condominium management association, (ii) owners of residences or residential lots in the case of a residential real estate management association…”
— 26 U.S.C. §528©(1)(B)
You test it looking backward: the determination “shall be made after the close of the organization’s taxable year” (Treas. Reg. §1.528-5).
Worked example. A 40-unit condominium collects $180,000 in regular assessments and earns $3,200 of interest. Gross income for the test is $183,200; exempt function income is $180,000, or 98.3%. Passed, and not close — assessments dwarf everything else on a residential association’s books. The association that fails has a large non-member revenue stream against a small assessment base: a commercial lease, a marina, a big antenna contract. That $180,000 goes at item B.
The 90% expenditure test — §528©(1)©
“90 percent or more of the expenditures of the organization for the taxable year are expenditures for the acquisition, construction, management, maintenance, and care of association property”
— 26 U.S.C. §528©(1)©
The form asks for both halves of the fraction: item C is “Total expenditures made for purposes described in 90% expenditure test,” item D is “Association’s total expenditures for the tax year,” and C divided by D must reach 90%.
Worked example. The same condominium spends $176,400: $170,600 on landscaping, management, insurance, utilities, repairs and reserve-funded roof work, plus $3,200 of social events and $2,600 to repair individually owned decks, rebilled to those owners. Item C over item D is 96.7%. Passed.
Two things trip boards. Expenditures, not expenses: cash out the door, reserve spending included. And spending on things that are not association property stays out of the numerator — which is why those deck repairs sit outside item C.
The “substantially all residential” test — §528©(2)–(3) and Reg. §1.528-4
The requirement is that “substantially all of its units, lots or buildings must be used by individuals for residences” (Treas. Reg. §1.528-4(a)), measured on the last day of the tax year. The regulation puts a number on it: for a condominium, “at least 85% of the total square footage of all units within the project is used by individuals for residential purposes” (§1.528-4(b)), counting space that serves the residences — “laundry areas, swimming pools, tennis courts, storage rooms and areas used by maintenance personnel.” For a lot-based association, “at least 85% of the lots are zoned for residential purposes” (§1.528-4©); commercial shopping areas and their parking do not qualify.
Worked example — the one that fails. A mixed-use building has 30 residential units totaling 38,000 square feet above 10,000 square feet of ground-floor retail, all in one association: 38,000 of 48,000, or 79.2%, below the 85%. This association cannot elect 1120-H; it files Form 1120, a less forgiving return, and mixed-use boards are usually surprised by that.
One provision matters more in 2026 than it used to. A unit is not residential “if for more than one-half the days in the association’s taxable year, such unit, or building is occupied by a person or series of persons, each of whom so occupies such unit, or building for less than 30 days” (§1.528-4(d)) — so a building that has tipped into nightly rentals can lose the test.
Exempt function income vs. taxable income
This is the whole return. Get the sort right and the rest is arithmetic.
The statute defines exempt function income as “any amount received as membership dues, fees, or assessments from— (A) owners of condominium housing units…, (B) owners of real property in the case of a residential real estate management association” (§528(d)(3)). The regulation gives the principle rather than the label — “What is important is that such income be derived from owners of residential units or residential lots in their capacity as owner-members rather in some other capacity such as customers for services” — plus the two bright lines that decide most close calls: income does not qualify “unless each member’s liability for payment arises solely from membership in the association,” and “Dues, fees, or assessments that are based on the extent, if any, to which a member avails him or herself of a facility or facilities are not exempt function income” (Treas. Reg. §1.528-9(a)). Charges everyone owes because they own a unit are exempt; charges that vary with what one person used are not.
| Receipt | Bucket | Authority |
|---|---|---|
| Regular assessments from unit or lot owners | Exempt function income | §528(d)(3); Reg. §1.528-9(a) |
| Special assessments for common-area work, billed to all owners | Exempt function income | Reg. §1.528-9(b) |
| Assessments the developer pays on unsold units | Exempt function income | Reg. §1.528-9(a) |
| Assessments computed on unit size or assessed value | Exempt function income | Reg. §1.528-9(a) |
| Excess assessments rebated or applied to next year | Not gross income this year | Reg. §1.528-9(a) |
| Late fees charged on delinquent assessments | Not classified by name — apply the §1.528-9(a) test with your preparer | — |
| Fines for rule violations | Not classified by name — apply the §1.528-9(a) test with your preparer | — |
| Interest on operating and reserve accounts | Taxable — line 2 | Reg. §1.528-9©(4) |
| Interest earned in a sinking fund | Taxable | Reg. §1.528-9©(4) |
| Tax-exempt interest (municipal bonds) | Neither — excluded; disclosed at item E | Reg. §1.528-9©(1) |
| Dividends | Taxable — line 1 | §528(d)(1) |
| Cell-tower or antenna rent from a carrier | Taxable | Reg. §1.528-9©(2) |
| Clubhouse rented to a non-member | Taxable | Reg. §1.528-9©(2) |
| Facility fee charged to a member for use not available to all members | Taxable | Reg. §1.528-9©(3); §1.528-9(a) |
| Laundry and vending income | Taxable | Reg. §1.528-9(a); §1.528-9©(2) |
| Amounts billed to an owner for work on privately owned property | Taxable | Reg. §1.528-9©(5) |
| Charges to members for transportation to shopping or work | Taxable | Reg. §1.528-9©(6) |
| Insurance proceeds | Not classified by name — depends on what the proceeds replace; ask your preparer | — |
| Resale certificate fee paid by the selling owner | Not classified by name — apply the §1.528-9(a) test with your preparer | — |
| Resale certificate fee paid by a title or escrow company | Not classified by name — a payment from a non-member; ask your preparer | — |
The unclassified rows are deliberate. No regulation under §528 classifies late fees, fines, insurance proceeds or resale certificate fees by name, and a guess in a table people copy into a workpaper is worse than a gap. Apply the regulation’s test with your preparer — does the liability arise solely from membership, or does it vary with what this owner did — then document the answer once and treat it the same way every year.
The sort is a bookkeeping job, not a tax job. HOA Fiscal’s ledger keeps assessment income and taxable income in separate accounts so the 1120-H numbers read straight off the year-end statements — every plan, see plans.
Line by line through the current form
The walk, in form order, using the same 40-unit condominium: $180,000 of assessments, $3,200 of interest, a $180 annual service charge on the investment account.
The header takes name, address and employer identification number, four check boxes — “(1) Final return, (2) Name change, (3) Address change, (4) Amended return” — and “Date association formed,” meaning incorporation, not developer turnover. An address change after filing goes on Form 8822-B.
Items A through E are the association’s own certification that it qualifies, and the first thing an examiner reads. A is “Check type of homeowners association” — one box, and it drives the rate on line 20. B is total exempt function income ($180,000 here), C expenditures for the 90% test, D total expenditures for the year, E “Tax-exempt interest received or accrued during the tax year,” disclosure only.
Then the body of the form, with the example’s figures at right.
| Line | Caption on the form | Example |
|---|---|---|
| 1 | Dividends | — |
| 2 | Taxable interest | 3,200 |
| 3 | Gross rents | — |
| 4 | Gross royalties | — |
| 5 | Capital gain net income (attach Schedule D (Form 1120)) | — |
| 6 | Net gain or (loss) from Form 4797, Part II, line 17 | — |
| 7 | Other income (excluding exempt function income) (attach statement) | — |
| 8 | Gross income (excluding exempt function income). Add lines 1 through 7 | 3,200 |
| 9 | Salaries and wages | — |
| 10 | Repairs and maintenance | — |
| 11 | Rents | — |
| 12 | Taxes and licenses | — |
| 13 | Interest | — |
| 14 | Depreciation (attach Form 4562) | — |
| 15 | Other deductions (attach statement) — the investment-account service charge | 180 |
| 16 | Total deductions. Add lines 9 through 15 | 180 |
| 17 | Taxable income before specific deduction of $100. Subtract line 16 from line 8 | 3,020 |
| 18 | Specific deduction of $100 (preprinted on the form) | 100 |
| 19 | Taxable income. Subtract line 18 from line 17 | 2,920 |
| 20 | Enter 30% (0.30) of line 19. (Timeshare associations, enter 32% (0.32) of line 19.) | 876 |
| 21 | Tax credits (see instructions) | — |
| 22 | Total tax. Subtract line 21 from line 20 | 876 |
| 23a–g | Prior-year overpayment credited forward; estimated tax payments; tax deposited with Form 7004; Form 2439 credit; fuels credit (Form 4136); elective payment election from Form 3800; total | — |
| 24 | Amount owed. Subtract line 23g from line 22 | 876 |
| 25–26 | Overpayment; portion credited to 2026 estimated tax or refunded, with routing number, account type and account number at 26c–26e | — |
Four points about that table.
Assessments never appear on lines 1 through 8. The block is captioned “Gross Income (excluding exempt function income)” on the form. The $180,000 was reported at item B and goes nowhere else on the return.
The deduction lines are narrower than they look. The form’s caption is the rule — deductions “directly connected to the production of gross income, excluding exempt function income” — and the regulation is stricter, requiring “both proximate and primary relationship to the production of such income” (Treas. Reg. §1.528-10©(1)). Landscaping, insurance, the roof, the management fee: none of it is deductible here, because none of it produced the interest. Where something serves both purposes the regulation allows allocation “on a reasonable basis,” with its own example — a manager paid $10,000 a year who spends 10% of the time on non-exempt income production supports “a deduction of $1,000 (10 percent of $10,000)” (§1.528-10©(2)). Here the only clearly connected cost is the $180 service charge; a share of the tax-prep fee is commonly allocated on the same theory.
The rate is statutory. The tax “shall be equal to 30 percent of the homeowners association taxable income (32 percent of such income in the case of a timeshare association)” (§528(b)). No graduated schedule, no net operating loss deduction (§528(d)(2)). The amount on line 24 must be paid electronically — plan on EFTPS, not a check.
An officer signs. The form asks for “Signature of officer,” a date and a title; the instructions name the president, vice president, treasurer, assistant treasurer, chief accounting officer or another authorized officer. A director who is not an officer does not sign, and neither does a management company. A paid preparer completes the “Paid Preparer Use Only” block with a PTIN and the firm’s EIN.
Deadlines, extensions and estimated tax
“Generally, an association must file Form 1120-H by the 15th day of the 4th month after the end of its tax year.”
— Instructions for Form 1120-H (2025)
For a calendar-year association that is April 15. Two exceptions follow: “an association with a fiscal year ending June 30 must file by the 15th day of the 3rd month after the end of its tax year” — September 15 — and a short tax year ending any time in June “will be treated as if the short year ended on June 30.” A due date falling on “a Saturday, Sunday, or legal holiday” moves to the next business day.
The extension. File Form 7004, “Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns,” by the regular due date; its instructions say “The automatic extension period for time to file is generally 6 months.” One trap is specific to this election: because the 1120-H election is not made until the return is filed, an association electing 1120-H “should file for an extension on Form 7004 using the original form type assigned to the entity” — the corporate code, not a 1120-H code. And the extension buys time to file, not to pay: “Form 7004 does not extend the time to pay any tax due.”
Estimated tax. This one surprises people, so here it is in the instructions’ own words: “The estimated tax and alternative minimum tax requirements do not apply to homeowners associations electing to file Form 1120-H. However, a homeowners association that does not elect to file Form 1120-H may be required to make payments of estimated tax.” A 1120-H filer makes no quarterly deposits. The estimated-tax lines exist only because “the election is not made until the return is filed,” so an association that deposited expecting to file Form 1120 can claim them.
Penalties. Late filing costs “5% of the unpaid tax for each month or part of a month the return is late, up to a maximum of 25%,” with a minimum on a return more than 60 days late of “the smaller of the tax due or $525”; late payment runs half of 1% a month to the same cap. On a return whose tax is $876 that is trivial. What is not trivial is how the same instruction sentence begins.
Making — and missing — the election
Form 1120-H is not a return an association is assigned. It is an election it makes every year, and the act of making it is filing the form: the association “elects (at such time and in such manner as the Secretary by regulations prescribes) to have this section apply for the taxable year” (§528©(1)(E)).
The regulation supplies the operational rules: “A separate election must be made for each taxable year,” and “the election must be made not later than the time, including extensions, for filing an income tax return for the year in which the election is to apply” (Treas. Reg. §1.528-8(a), (b)). It runs one way once made — “Once Form 1120-H is filed, the association cannot revoke its election for that year unless the IRS consents.” So there is no permanent status to lose and nothing to renew. There is only this year’s form, filed on time.
Then this. The instructions’ penalty paragraph opens: “In addition to losing the right to elect to file Form 1120-H, a homeowners association that doesn’t file its tax return by the due date, including extensions, may be penalized 5% of the unpaid tax…” Losing the right to elect is the real exposure. Without it the association is on Form 1120, where the exclusion of member assessments rests on a theory that must be maintained deliberately every year.
There is a relief valve, narrower than boards hope. An association that “fails to make the regulatory election to be treated as a homeowners association” can get “an automatic 12-month extension to make the section 528 election, provided corrective action is taken within 12 months of the due date (including extension) of the return,” citing Regulations section 301.9100-2. Past that window the instructions describe no automatic relief.
The tax on this return rarely hurts a small association. A year nobody filed does.
Form 1120-H vs Form 1120, in four sentences
An association that does not elect 1120-H “must file the applicable income tax return, for example, Form 1120, U.S. Corporation Income Tax Return,” which taxes net income at the flat corporate rate of “21 percent of taxable income” (26 U.S.C. §11(b)) — meaningfully cheaper than 30% once the taxable number is large. The catch is that on Form 1120 the exclusion of member assessments is not handed to you by statute the way §528 hands it over; it depends on a position maintained annually, including the Revenue Ruling 70-604 election the owners must actually vote each year, and a missed vote can pull that year’s excess assessment income into taxable income in a way 1120-H never does. For an association whose taxable income is a few thousand dollars of interest, 30% of a small number beats the professional fees and governance discipline the alternative demands. A full side-by-side — including where the arithmetic genuinely flips — is coming as its own post.
State returns
The federal election does not settle the state. Some states have no corporate income tax at all — Washington is one — so a 1120-H filer there owes the department of revenue nothing further, though the nonprofit corporation’s annual report with the secretary of state is a separate obligation, and the one associations actually miss. Other states run their own version of the same idea: California’s Franchise Tax Board explains in FTB Publication 1028 that nonexempt function income is what gets taxed, and that “If the nonexempt function income (subject to tax) for the year exceeds $100, then the organization must file Form 100.” Several states want a corporate return even when the tax is zero; a few accept a copy of the federal form. Check your own state, and put its deadline on the same calendar entry as the federal one.
Records to keep
Three things, the same three every year.
A ledger that separates the buckets. Assessment income, special assessments, late fees and interest each get their own account, with interest posted by bank account so operating and reserve interest are visible separately. If the year-end income statement already reads exempt-function on one side and taxable on the other, item B and lines 1 through 8 fill themselves in. If it does not, someone spends a Saturday re-sorting a general ledger, and that is where errors enter.
The allocation worksheet. One page showing which costs you treated as directly connected to taxable income, on what basis, and the arithmetic. Reg. §1.528-10©(2) asks for a reasonable basis; a worksheet is what “reasonable” looks like three years later.
The filed return and proof of timely filing. The election lives or dies on the filing date, so keep the e-file acknowledgment or certified mail receipt with the return, and the reconciled year-end bank statements alongside, since line 2 traces to those. Seven years is the sound default, and some states require it — Washington, for one (RCW 64.90.495(1)).
What to do this month
- Pull last year’s return. Confirm the box checked at item A and that it was filed on time. If no return exists for a prior year, deal with that first.
- Check the chart of accounts for separate income accounts for interest, assessments, special assessments and late fees. Fix it before December so the year-end statements sort themselves.
- Run the two ratios year to date: exempt function income over gross income (needs 60%), and expenditures for association property over total expenditures (needs 90%). If either is close, get advice while you can still act.
- List the taxable receipts — every interest-bearing account, any rental or antenna contract, laundry or vending income, any fee tied to what one owner used — and confirm each has a ledger account.
- Calendar April 15 (or the 15th day of the 4th month after your fiscal year end) with a 30-day reminder, and note that payment must be electronic.
- Decide who prepares and who signs. Name the officer at a board meeting and put it in the minutes, so filing does not depend on remembering who did it last year.
Frequently asked questions
Who has to file Form 1120-H?
Nobody is required to use it — it is an election. A qualifying association may choose it each year by filing the form; one that does not “must file the applicable income tax return, for example, Form 1120.” What is not optional is filing something: every association files a federal return every year, tax or no tax.
What is exempt function income?
Membership dues, fees and assessments from owners of residential units or lots in their capacity as owner-members — regular assessments, special assessments, developer assessments on unsold units. The test is that “each member’s liability for payment arises solely from membership in the association.” It goes at item B, is not taxed, and never appears on lines 1 through 8.
What is the tax rate on Form 1120-H?
A flat 30% of homeowners association taxable income, or 32% for timeshare associations (26 U.S.C. §528(b); line 20). Taxable income is gross income excluding exempt function income, less deductions directly connected with producing it, less a $100 specific deduction. No graduated rate, no net operating loss deduction.
When is Form 1120-H due?
The 15th day of the 4th month after year end — April 15 for a calendar-year association. An association with a fiscal year ending June 30 files by the 15th day of the 3rd month, September 15. A due date on a weekend or legal holiday moves to the next business day. Form 7004 gives an automatic extension, generally six months, but does not extend the time to pay.
Can I e-file Form 1120-H?
Yes. The instructions say associations can generally e-file Form 1120-H, related forms, schedules and attachments, and Form 7004. It is mandatory for an association filing 10 or more returns of any type in the calendar year — income, employment, excise and information returns all count — though a waiver can be requested. Tax due must be paid electronically.
What happens if an HOA doesn’t file a tax return?
It loses the right to elect Form 1120-H for that year, and faces a late-filing penalty of 5% of the unpaid tax per month to a 25% cap, with a minimum on returns more than 60 days late of the smaller of the tax due or $525. The penalty is usually small; losing the election is not. The instructions describe an automatic 12-month extension to make the §528 election if corrective action is taken within 12 months of the due date including extensions (Regulations section 301.9100-2).
Is an HOA tax-exempt?
No. An association filing Form 1120-H is a taxable corporation with a statutory exclusion for exempt function income, which is a different thing from exemption: §528 says a qualifying association “shall be subject to taxation under this subtitle only to the extent provided in this section.” A few hold recognized exemption under §501©(4) or §501©(7); that is rare, requires a separate application, and nonprofit incorporation does not confer it.
Do I have to file Form 1120-H every year — is the election permanent?
Every year. “A separate election must be made for each taxable year,” no later than the due date including extensions for that year. There is no permanent status and nothing to renew — and nothing to fall back on if a year gets missed. Once filed, the election is binding for that year and cannot be revoked without the Commissioner’s consent.
File it yourself from this guide, or have it prepared. Dynamite Management prepares Form 1120-H from your HOA Fiscal ledger for $175 a year on the Essentials and Automate plans, and it is included on the Managed plan — HOA tax preparation. Keeping the books yourself? The ledger, budget and year-end package are in every plan — compare plans, or start with the free HOA Budget Tool. The return is one chapter of the job; the rest is in how to self-manage an HOA.