Cohousing-L Mailing List: Re: tax exempt status for HOAs

[Evdavwes (Evdavwes]

Hello, All
 
I have been learning about HOA taxation from our accountant.  I am not  an 
expert.  Feel free to correct any misimpressions I may give.  
 
Supposedly, a HOA could decide to be taxed as a regular corporation (paying  
tax on any excess of income over expenses, including any increase in  
reserves).  This may correspond to the way it would be treated if it filed  
form 1120 
for the yearly return.  The tax on excess revenue (AKA  profit) is 15%.
 
Many HOA's decide to file form 1120H.  This allows them not  to pay tax on 
excess revenue (there may be rules about the reserves being  accumulated for 
certain uses only).  However, they pay 30% federal tax on  income from 
investments.  Our accountant has advised us to elect 1120H  status, and to 
invest only 
in a municipal bond fund, which is  totally federal tax-exempt and is state tax 
exempt to the extent that  income comes from our state (NC).  The muni bond 
fund pays 3-5%  roughly.  However, it is not insured, and we are considering a 
change to  regular CD's, which would be insured, but for which the effective 
interest rate  would be reduced by the 30% tax.  We have ended up with only a 
small tax  bill most years.
 
David Clements, _Westwood  Cohousing,_ (http://www.westwoodcohousing.com/)  
Asheville, NC
 



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