Homeowners, condominium and timeshare associations (“Associations”) often make the mistake of not filing tax returns based on the belief that they are exempt from having to do so. However, Associations are required to file tax returns like any other corporation, even if they’re not-for-profit.
Fortunately, most Associations don’t have much, if any, tax liability. This is partially due to the fact that most Associations generally only take in funds to operate and maintain their facilities, rather than for the purposes of generating profit.
Section 528 (“528”) of the Internal Revenue Code governs the taxation of qualified Associations, and most Associations elect to be taxed under this Section for tax purposes. 528 defines Homeowners and Condominium Associations as follows:
- Organized to provide for the acquisition, construction, management, maintenance, and care of association property;
- At least 60% of the Association’s gross income consists of membership dues, fees, or assessments paid by the owners;
- 90% or more of the Association’s expenditures are made for the purposes of acquisition, construction, management, maintenance, and care of Association property;
- No part of the net earnings inures solely to the benefit of any private shareholder or individual.
Thus, to qualify under 528, an Association must be legally organized pursuant to the statute, generate most of its revenue from dues and assessments from the owners, and use that revenue to maintain its property. In addition, 85% of the units must be used as residences. Qualified Associations under 528 are exempt from paying taxes, otherwise assessed at a rate of 30%, on all income which consists of membership dues, fees, or assessments from the owners of the housing units.
There are two common tax return forms applicable to Associations: IRS Form 1120-H and IRS Form 1120. Which form is filed will generally depend on the status of the Association; specifically, whether or not it qualifies under 528. If the Association meets the requirements as set forth in 528, most Associations will file Form 1120-H in order to receive the tax exemption provided therein.
If, on the other hand, the Association does not qualify under Section 528 or is filing late, the Association will need to file the applicable income tax return which is generally Form 1120, U.S. Corporate Income Tax Return. Filing a Form 1120 can also have certain tax advantages and incentives however. For example, non-exempt taxable income under 528 is assessed at a rate of 30%, whereas the applicable corporate tax rate can be as low as 15% when filing Form 1120.
Virgin Islands homeowners, condominium and time share associations should consult with an attorney experienced in real estate and real estate tax matters prior to filing their returns. Critical evaluations need to be applied in order to achieve the maximum tax incentives available.
Attorney J. Nash Davis is an Associate in the Real Estate and Financial Services Practice Group of BoltNagi PC, a U.S. Virgin Islands law firm with extensive experience in real estate and tax issues which regularly advises homeowners, condominium and time share associations.
 Payments from nonmembers and certain other sources of income are not exempt under Section 528 and are taxable at the rate of 30%. See Section 528 of the I.R.C.