506 Master Associations
The tax rules that apply to condominium and homeowners' associations generally
also apply to master associations
- IRS Regulation 1.528-1 (HTL—Appendix 5N) states, “. . . if the
- membership of an organization consists of other homeowners associations, the
- owners of units, residences, or lots who are members of such homeowners
- associations will be treated as the members of the organization for the
- purposes of the regulations under Section 528.” Thus, so long as a master
- association meets the qualifying tests under IRC Section 528 (see paragraph
- 502.3), it may file its income tax return on Form 1120-H.
Residential or Nonresidential?
506.2 It may be difficult to determine if a master association is
residential or nonresidential when it is made up of a combination of different
types of associations; e.g., homeowners' associations plus commercial
condominium associations. That determination is critical when deciding whether
the master association qualifies:
- • To file Form 1120-H. (See
- paragraph 506.5.)
- • For a carryover of excess
- membership income under Revenue Ruling 70-604. (See paragraph 506.6.)
506.3 The only guidance dealing with the qualification of a master
association as a residential homeowners' association is found in Treasury
Regulations 1.528-1 (see paragraph 506.1) and 1.528-4. Treasury Regulation
1.528-4 (HTL—Appendix 5N)
- requires that 85% of the square footage of a condominium association be
- used for residential purposes or that 85% of the lots of a residential real
- estate management association be zoned for residential purposes. Timeshare
- associations are not affected by the substantially residential test.
506.4 If a master association is a mixed-use association, consisting of
a combination of condominiums, residential lot associations, timeshare
associations or units, and commercial use lots, the substantially residential
determination is made by
- applying the criteria in the regulations to all subsidiary association
- members as a whole. Beginning at paragraph 502.6 is a detailed discussion of
- the substantially residential test.
Filing Form 1120-H
As explained in paragraph 506.1, to qualify to file Form 1120-H, the master
association as a whole should meet the provisions discussed in paragraph 502.3.
As a first step, the
- transient use test should be applied to see if the CIRA is residential
- or nonresidential. Based on the answer to the transient use test, a
- determination must be made about whether the master association as a whole
- meets the substantially residential test. If it does, the 60% income test, 90%
- expenditure test, and the lack of benefit test should be applied to see if the
- master association qualifies to file Form 1120-H under IRC Section 528
- (HTL—Appendix 2K).
506.6 To qualify for a carryover of excess membership income under
Revenue Ruling 70-604 (HTL—Appendix 6H), a master association may have
to meet the substantially residential test
- discussed beginning in paragraph 502.6. As noted in paragraph 503.27,
- the IRS has released contradictory advice about whether the revenue ruling
- applies only to residential associations. Accountants should be alert for
- future developments in that area.