HOA & Non-Profit 501(c)7 Status

Started by RichardC32 • 9 replies • 154 views

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RichardC32 (South Carolina)
Posts: 3

Posted:

Has anyone in the group had success with filing as a Non-Profit? With the new FinCen CTA/BOI Compliance filing required was looking into the possibility of changing our HOA to a 501(c)7 entity. We're in South Carolina, Greenville County.

TimB4 (Tennessee)
Posts: 21,062

Posted:

Looking at the record keeping process, I think it would be difficult to obtain and continue to have.

I'm thinking that since common elements would be available to renters and guests, an argument can be made that the Association facilities are used by the general public vs. just members.

Certainly something you will need legal assistance with.

CathyA3 (Ohio)
Posts: 6,299

Posted:

You need to talk to your association's lawyer and tax professional.

I'm neither of these, but my understanding of these entities is that they are social clubs that are organized for pleasure, recreation, and other nonprofitable purposes. My association's attorney emphasized during one of our training sessions that we are not a social club or fraternal organization. We are organized to maintain the common elements, however those are defined in our governing documents. If your community is a typical HOA with nothing unusual about it, it's unlikely that you'd qualify for this status.

In addition, one of the main requirements for other tax exempt organizations such as charities is that they must serve the public or some segment of it. This is exactly what HOAs do not do.

Finally, the deadline for beneficial owners to file their information with the government is January 1 2025. It's very unlikely you'd get a ruling out of the IRS prior to that. You certainly don't have enough time between now and then to go though the legal process of amending your governing docs, conducting a homeowner vote (which probably requires unanimous approval, check your CC&Rs for that), and recording the relevant legal documents in your county.

What may be helpful is supporting CAI's lawsuit against the Treasury on behalf of its members, since the CTA has already been ruled unconstitutional by one court. Or write to your congresspersons (maybe after the election) supporting legislation that would exempt community associations from the CTA.

For now, if you're on the board of your HOA or you own 25% or more of the units in your condo community, most community association lawyers recommend reporting your information to the government by the deadline, because the penalties for not doing so are painful.

TimB4 (Tennessee)
Posts: 21,062

Posted:

Here is some references:

Tax Exemption for HOA Communities from a MC that offers accounting services.
One of the big hurdles in obtaining 501(c)7, per this article is:

"However, Section 501(c)(7) also has certain disqualifications that may be deal-breakers for homeowners associations. For instance, the HOA cannot implement or enforce architectural guidelines to maintain the community’s external appearance."

R. HOMEOWNERS' ASSOCIATIONS UNDER IRC 501(c)(4), 501(c)(7) AND 528 from the IRS

Can My HOA get Tax-Exemption from the IRS? from a legal firm

Subject: Forming HOA from existing 501 (c) (7) 2016 thread on this site that where a 501(c)7 Association wants to drop it and become a simple HOA. Might be an interesting read for you. KevinR2, who started the thread may or may not still be active on this site.

RichardC32 (South Carolina)
Posts: 3

Posted:

I will certainly propose supporting CAI's lawsuit to our board and thank you for input. Agree that filing is a must at this time to avoid nasty penalties. I understand the Fed's want for oversight but HOA's, especially smaller associations, should have a means to request exemption.

CathyA3 (Ohio)
Posts: 6,299

Posted:

Without going too much down the rabbit hole, I think lawmakers showed that they don't understand the nature of HOAs if they believe that money launderers could hide their activities via an HOA. Also, the term "beneficial owner" makes no sense in the context of an association where all owners basically own one home and the membership has the authority to remove the entire board if they want to do so. And state laws require that association records be made available to members on request - transparency is baked into the process.

There have been a few instances where a criminal gang took control of an HOA's board (eg., The Hammocks down in Florida). But the CTA's reporting requirements wouldn't have outed the crooks in Florida unless they were operating in multiple locations via a network of shadow corporations. And you know what? The crooks probably wouldn't have reported anything - they're already criminals, does anyone think that violating another law would make them pause? By definition the CTA is going to catch law-abiding folks - not the sort who would be financing international terrorist networks.

DeanJ
Posts: 1,786

Posted:

Quote:

Posted By RichardC32 on 10/28/2024 3:50 AM
Has anyone in the group had success with filing as a Non-Profit? With the new FinCen CTA/BOI Compliance filing required was looking into the possibility of changing our HOA to a 501(c)7 entity. We're in South Carolina, Greenville County.

Why is your board wanting to hide their HOA activities from view of the govt?

If I lived in an HOA where the board attempted avoid FinCen, I would be pushing for an independent audit.

RichardC32 (South Carolina)
Posts: 3

Posted:

Nobody is trying to hide anything. We're a small HOA that is self-managed that's just trying to cut down on the work it takes to run our Board. Why is it that you'd think something nefarious is going on?

ElleN (Idaho)
Posts: 1,339

Posted:

Quote:

Would 501(c)(4) do the same thing? If so, see BillH10's posts in this thread: https://www.hoatalk.com/Forum/tabid/55/forumid/1/postid/364538/view/topic/Default.aspx

I know about the CTA. I have not looked at this particular aspect (501(c)(4) vs. (7)).

TimB4 (Tennessee)
Posts: 21,062

Posted:

The problem with 501(c)4 is typically the need for the function of the HOA to be for the general public vs. just the membership.

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