J.R. from Hartford County, Connecticut writes:
Dear Mister Condo,
I serve as Treasurer at my condo and I have a tax question. Why do we, as a condo, have to file income tax returns if we are an exempt homeowner’s association? It seems like a lot of extra work for no good reason.
Mister Condo replies:
J.R., I am no fan of extra paperwork but I am guessing there is a logical explanation. I decided to ask Sam Tomasetti, CPA of Tomasetti, Kulas & Company, P.C. to give us a proper answer. Here’s what Sam had to say:
A residential condominium association has basically two choices when it files its annual Federal income tax return. It can either file as a homeowner’s association under IRC Section 528, or it can generally file as a corporation under IRC Section 277. In no way is it exempt from the Federal tax system.
When a residential condominium association elects to file under IRC Section 528 it must break down income and expense between exempt function activities and those that are entered into for the production of income such as laundry income and interest income earning activities (referred to as nonexempt function activities). Once this analysis is performed, the net nonexempt function activities are taxed at the flat rate of 30% after a statutory allowance of $100 is deducted.
On the other hand, when a residential association files an annual tax return according to IRC Section 277, it must analyze the components of income and expense into membership and non-membership activities. The net non-membership income is taxed at regular corporate income tax rates.
In summary, although there are some aspects of residential condominium association that are generally exempt from income taxes, a tax return is still required to be filed, and there may be some taxes owed on either nonexempt function activities or non-membership activities.