HOA Income

It's a misconception that your HOA cannot conduct "business."

It could lease the land, and put the revenue back into the land itself, or pay for some other expenditure for the benefit of the HOA.

What the IRS would not want to see is piles of undesignated funds sitting in your bank account. So . . . if this leasing business got to be very successful, you could even reduce HOA dues for your membership!

Mike:

the answers are in your documents...at least some of the answers. I am assuming your documents give your board the right to do what they feel is necessary with HOA owned land. As for the income part of it, I would check with your accountant and see if it will change anything, worst case is you may have to pay taxes on the income...

Check your docs one more time...ours give us the right to pretty much do what the board feels necessary with HOA land as long as it is in the best interest of the homeowners. If yours is similar I think this falls into it and actually seems like a great use of resources. You can make money, it just alters your tax paying structure I believe...

MikeJ,

The main thing you need to be careful of is to not jeopardize your HOA's favored IRS tax status as an HOA.

Corporations generally file their income taxes on IRS Form 1120. HOA's, however, are granted a special tax status which exempts most of their income from tax. HOA's generally file on IRS Form 1120-H.

Under the IRS rules, to qualify for the favored tax status of an HOA, at least 60% of the HOA's total income must be "exempt function income," and no more than 40% of the total income can be "non-exempt function income."

"Exempt function income" is your association's dues (assessments) paid by every homeowner. This income is not taxable. " Non-exempt function income" would be income that comes from other sources, usually non-members, but can also include income from members that is paid for the use of specific amenities by some, but not all, association members. Examples of non-exempt function income include interest received on HOA bank deposits, rental of association property, and lease payments on HOA property (of the type you are suggesting). Non-exempt function is taxable, subject to a $100 deduction.

For example, suppose the HOA's total income is $100K. At least $60K must be from member's dues, and is non-taxable. No more than $40K can be from other sources, such as your lease income, most of which will be taxable.

There are rules regarding the HOA's expenditures also (the 90/10 expenditure test). If your HOA's income and expenditure ratios do not qualify you to file Form 1120H, you will be required to file the more complicated Form 1120 and be taxed just as any other corporation.