Tax Reform and Community Associations

U.S. Congress has been talking about Tax Reform for several years and President Trump has now turned his focus to Tax Reform by asking Congress to deliver a plan. This week, CAI submitted comments to the Senate Finance Committee to consider as they discuss Tax Reform.

Business Tax Code:  Under the Internal Revenue Code (IRC), community associations are usually subject to the business tax code.  There are three areas in which Community Associations Institute is pushing for reform.

• 1. Clarify that community associations qualify for tax-exempt status under IRC) Section 501(c)(4) as a “social welfare” organization.
     
     Community associations are typically organized under state statute as non-profit corporations.  Notwithstanding this standard procedure, community associations may not qualify for tax-exempt status under the IRC due to interpretations of IRC Section 501(c)(4) by the Internal Revenue Service (IRS).CAI advocates to clarify community associations qualify for tax-exempt status under IRC Section 501(c)(4) as a “social welfare” organization.
     
     
  2. Clarify IRC Section 118 to provide that unused insurance deductible funds are a capital item and not taxable income.If an association is eligible to file IRS Form 1120-H, maintaining insurance deductibles as an expense line item does not pose a direct federal income tax problem.If an association files IRS Form 1120, the treatment of the insurance deductible as an expense line in years the association did not incur insured losses would result in the association reporting excess income which will trigger taxation.

     CAI advocates to clarify IRC Section 118 that unused insurance deductible funds are a capital item and not taxable income.  This will create an incentive for community associations to budget for full insurance deductibles and create a more financially stable community association.

  3. Clarify the application of Subchapter T (IRC Sections 1381-1388) to establish interest income from reserves as a patronage dividend activity and not subject to taxation for all community associations— including condominiums, housing cooperatives, and homeowners associations.Interest income from reserves for housing cooperatives are not subject to taxation; however, interest income for condominiums and homeowners associations are not treated the same and are subject to taxation.CAI advocates to clarify application of Subchapter T (IRC Sections 1381-1388) to establish interest income from reserves as a patronage dividend activity and not subject to taxation for all community associations; including condominiums, housing cooperatives, and homeowners associations.  

Personal Tax Code:  Homeowners in community associations often pay a property taxes to their local municipalities for services they are receiving from their community associations.  Services delivered by a community association is funded through assessments collected by the owners.  That means, owners of homes/units in community associations are often paying twice for delivery of municipal services.   CAI is advocating a remedy to this inequity by a change to the personal tax code by:

CAI advocates for equity for homeowners living in community associations as they pay local taxes without receiving the same benefits as homeowners living outside of a community association.  The Congress should amend the IRC to allow homeowners living in a community association to deduct community association assessments expenses from their annual individual personal tax obligation.