A homeowners association is generally a nonprofit organization created by a community developer before the developer sells the first property to a new homeowner.  

What’s a Typical HOA Formation Scenario?

Developer ABC Inc., a Delaware corporation, is a Florida real estate developer. The developer purchased 2,000 acres in southwest Florida to develop 5,000 single-family homes as part of a master-planned community.

Before the developer sold the first home, it created an HOA that adopted a vision for the community. To further the vision, the HOA enacted standards, rules, and objectives that all homeowners within the community must follow to further the collective goals.

Every homeowner who purchases one of the 5,000 single-family homes in the new community must adhere to the regulations set by the HOA.

HOA Vision and Objectives

The purpose of the HOA is to manage common areas within the community and enforce rules and other restrictive covenants, ensuring homeowners maintain their property consistent with the developer’s original intent for the community.

Some of the most common objectives for a community include the following:

  • Promote a shared community vision
  • Maintain and improve common areas and assets
  • Promote a clean, safe, and welcoming environment for residents and their guests
  • Preserve and increase property values for all of the homeowners within the community

In order to meet those objectives, the HOA may establish the following rules for the community.

  • Annual Dues. Each homeowner must pay their annual dues to fund the maintenance and improvements to the common areas.
  • Consistent Aesthetics. To preserve the community vision, every home must adhere to strict aesthetic standards. These standards may include restrictions on paint colors used for the home exterior, roofing materials, how often the lawn should be mowed and at what height, restrictions on children’s playgrounds, trampolines, and other equipment, and limitations on the number and types of vehicles which may be parked in the driveway.
  • Personal Use Limitations. An HOA can restrict a homeowner’s ability to rent the property to temporary tenants, such as through an Airbnb rental service.
  • Noise Complaints. An HOA may require more stringent noise restrictions than state, county, city, or other local ordinances. For example, Hillsborough County, FL, set a standard where residential areas have a 60 decibels limit for residential areas from 7:00 am to 10:00 pm. However, an HOA in a residential neighborhood may set a more restrictive measure than the county ordinance.
Federal Tax Filing Obligations for an HOA

An HOA must file an income tax return each year. Depending upon its organization, the HOA can file one of three possible tax returns.

  1. Form 990. If an HOA is exempt from income taxes under Section 501(c)(4), it can file Form 990 (Return of Organization Exempt from Tax).
  2. Form 1120-H. If the HOA meets the relevant gross income and expense requirements (i.e., 60% of gross income is exempt and 90% of expenses are attributed to the exempt purpose), then the HOA files Form 1120-H (US Income Tax Return for Homeowners Associations). Please view our video tutorial on preparing Form 1120-H for an HOA for the 2021 tax year.
  3. Form 1120. If the HOA does not meet either of the two standards above, it files a regular Form 1120 (US Corporation Income Tax Return).
Additional Information

HOA members and residents can find more tax information about HOA’s on the IRS website and viewing the Form 1120-H instructions.