Condo associations and HOAs are being told to save more money. But a 1980 tax is making that more difficult than it should be in 2026.
TThe message is amplifying just about everywhere. Aging buildings need larger reserves. Insurance costs and deductibles are rising. Deferred maintenance has become a lending issue. Fannie Mae and Freddie Mac are tightening condominium project standards, including a new 15% standard reserve contribution requirement taking effect in 2027. Yet a tax rate set in 1980 is still adding to the debit column in 2026.
The 30% Tax on HOA and Condo Reserve Earnings
Homeowners associations and condominium associations are supposed to save for the future.
Roads deteriorate. Roofs wear out. Elevators, retaining walls, swimming pools, façades, mechanical systems and other common property eventually need major repairs or replacement. Rather than hand the entire bill to whichever homeowners happen to be around when something fails, well-managed associations collect money over time and build reserves. Then they try to make that money work while they’re waiting to spend it. That’s where an obscure provision of the federal tax code enters the picture.
Many qualifying HOAs and condominium associations elect to file their federal taxes under Section 528 of the Internal Revenue Code using Form 1120-H. The arrangement provides an important benefit: qualifying dues and assessments collected from homeowners are generally excluded from the association’s gross income.
Interest earned on reserve funds is another matter. The IRS specifically treats interest earned on amounts held in a sinking fund as nonexempt income. After applicable deductions, taxable nonexempt income under Section 528 is taxed at a flat 30%.
That rate was established in 1980. It hasn’t changed since.
The consequences become more interesting as associations are pushed to save more money, because the better funded an association becomes, the larger the reserve balance capable of generating taxable interest becomes.
Saving more doesn’t leave an association worse off. More reserves are better than fewer reserves. But federal policy is increasingly encouraging prudent reserve accumulation in one context while federal tax policy takes a relatively large cut of the taxable earnings those accumulated reserves can produce in another.
For condominium associations, that contradiction is about to become considerably more relevant.
What Exactly Is Being Taxed?
First, this isn’t a 30% tax on HOA or condo fees. It’s not a 30% tax on the reserve balance either.
Think of the association’s money as falling into two broad buckets under Section 528:
- Qualifying money homeowners contribute through dues, fees and assessments to operate and maintain their community. The tax code calls this “exempt function income.” For an association qualifying and electing treatment under Section 528, that income is generally excluded from gross income;
- Income the association earns from other sources. That can include rental income, certain income received from nonmembers and investment income. And that includes taxable interest generated by reserve funds.
Suppose homeowners have accumulated $1 million in reserves for future capital projects and the association earns 4% on that money. That’s $40,000 in annual interest.
Assume there aren’t any applicable deductions besides the $100 specific deduction allowed under Section 528. The association would have $39,900 in taxable income. At 30%, its federal tax would be $11,970. Instead of retaining the full $40,000 generated by money homeowners put aside for future repairs, the association retains about $28,030 after federal tax. The principal is still there, but some of the money it earned isn’t.
But Wait. The D.C. Council Wants a Slice, Too
The federal government isn’t the only government taxing the earnings on money homeowners have saved for future repairs.
In the District, condominium associations and HOAs can also owe the 8.25% corporate franchise tax on taxable income. Maryland taxes applicable association income at its 8.25% corporate rate, while Virginia taxes Virginia corporate taxable income at 6%. These aren’t special tax rates created for reserve funds. They’re separate state and District taxes imposed through each jurisdiction’s corporate tax system.
| Jurisdiction | Rate | What the rate is based on |
|---|---|---|
| D.C. | 8.25% | D.C. taxable income under the corporate franchise tax. The D-20 calculates total D.C. taxable income and applies 8.25%. There are also minimum-tax rules. |
| Maryland | 8.25% | Maryland taxable income. Maryland goes further and specifically defines an HOA as a “special exempt entity”; its “applicable tax base” expressly includes the portion of income taxed under IRC §528(b). Maryland’s corporate rate is 8.25%. |
| Virginia | 6% | Virginia taxable income, beginning with federal taxable income and then applying Virginia modifications. Virginia has specifically ruled that a §528 HOA properly starts with its federal taxable income and is subject to Virginia income tax. |
Go back to our $1 million reserve example. The association earned $40,000 and, after the $100 deduction in our simplified federal calculation, had $39,900 in taxable income. The federal government took $11,970.
Using that same $39,900 as an illustrative local taxable base, D.C. would take another $3,291.75. The combined federal and District tax would be $15,261.75 out of the $40,000 the homeowners’ reserve fund earned. Maryland produces the same illustrative total at its 8.25% rate. In Virginia, the additional 6% would be $2,394, bringing the illustrative combined tax to $14,364.
Actual state and District taxable income can differ from the federal amount because each jurisdiction has its own adjustments. But there’s nothing hypothetical about the additional layer of taxation.
The homeowners still have to replace the roof. They still have to repair the façade, repave the road and replace the elevator. Neither the federal government nor the state or District assumes a penny of those future obligations because it collected tax on the earnings intended to help pay for them.
And now our 2.8% after-federal-tax return in the next example starts looking generous.
The Tax Doesn’t Just Affect This Year’s Interest
Reserve funds exist precisely because major community expenses often occur years or decades in the future. That makes compounding important.
Consider $10,000 set aside today and earning 4% annually for 20 years. Without taxes reducing the annual return, $10,000 compounded at 4% grows to approximately $21,911. Now simplify the Section 528 tax effect by assuming the entire annual return is taxable at 30%. A 4% return becomes approximately 2.8% after federal tax. After 20 years, the same $10,000 grows to approximately $17,366. The difference is about $4,545.
The federal government hasn’t taken $4,545 directly from the original $10,000. The effect accumulates over time. Each year’s tax reduces the amount left in the account, which reduces the amount available to generate earnings in subsequent years.
Scale that up to an association. Start with $2 million in reserves and make the same deliberately simplified assumptions: a constant 4% return, a 30% tax on the earnings, no additional contributions or withdrawals, and no other deductions. At 4%, $2 million grows to approximately $4.38 million after 20 years. At an approximate 2.8% after-tax return, it grows to about $3.47 million. The difference approaches $910,000. What could an association improve for nearly a million dollars? For a condominium association, how much more secure would that association be with an additional $900,000 as Fannie Mae and Freddie Mac push applicable condo projects toward stronger reserve funding?
Real association finances don’t behave that neatly. Reserve funds receive new contributions and pay expenses. Interest rates change. Associations may have deductible expenses associated with generating taxable income. Some investments, such as municipal bonds, can generate federally tax-exempt income. Major projects occur throughout the period rather than conveniently waiting until Year 20. The example isn’t intended to forecast an association’s actual tax bill. But it demonstrates the mechanism.
The tax doesn’t merely remove part of today’s interest. It also removes the future earnings that money could have generated.
The Better Funded the Association, the More There Is to Earn Interest
This is where the issue becomes counterintuitive. Nobody should conclude that an HOA or condominium association is financially better off keeping inadequate reserves so it can avoid paying tax on the earnings. That would be absurd. But the better funded the association becomes, the larger the pool of homeowner money available to produce taxable investment income.
A community with $100,000 in reserves has relatively little money generating interest. A community with $1 million has considerably more. An association with $5 million or $10 million accumulated for roofs, roads, façades, elevators, structural work and other long-term obligations has a substantial amount of homeowner money that needs to be safely managed until it’s needed. Prudent financial management therefore creates the very investment income Section 528 taxes.
The association saves because future owners shouldn’t receive an enormous bill when an asset reaches the end of its useful life. It invests those savings conservatively because leaving millions of dollars idle for years would allow inflation to erode their purchasing power. Then a portion of the earnings intended to help offset that erosion leaves the reserve fund through federal income tax.
The capital obligation doesn’t leave with it. The road still deteriorates. The roof still ages. The elevator still reaches the end of its useful life.
If investment earnings don’t supply as much of the future cost, homeowners ultimately have to supply more.
Why Would an Association Choose a 30% Tax Rate?
At first glance, there’s an obvious question.
The regular federal corporate income-tax rate is currently 21%. Why would an HOA voluntarily elect a tax regime carrying a 30% rate?
Because comparing 21% and 30% doesn’t tell the whole story. A major Section 528 advantage is the treatment of qualifying homeowner assessments as exempt function income. The dues and assessments owners pay generally aren’t taxed. The association pays tax on money it earns from other sources, including interest on its reserves.
The alternative is the ordinary corporate tax system using Form 1120. Associations can choose it. In fact, the IRS suggests that associations calculate their tax under both systems and file whichever produces the lower tax.
But choosing between the two forms isn’t as simple as choosing the lower tax rate. Form 1120 and Form 1120-H treat an association’s income and expenses differently, so associations have to calculate which one works better for them.
But why is the 30% rate under 1120-H still the same rate Congress set in 1980?
Congress Was Actually Cutting the Tax
Congress created Section 528 in 1976. The underlying principle was that homeowners shouldn’t suddenly incur a federal income-tax problem merely because they pooled their money through an association to maintain commonly owned residential property. The treatment of income generated outside those owner assessments, however, was different.
At the time, an association’s taxable nonexempt income could be subject to the highest corporate tax rate. The rate then was 46% and Congress decided that was too high. But Congress didn’t simply give associations access to the ordinary corporate tax brackets of the time, either. At the time, corporations had graduated rates, with the first $25,000 of taxable income potentially taxed at only 17%. And Congress thought that could be too low.
The Senate Finance Committee thought members of homeowners associations were likely to be in higher tax brackets.
There was also concern that multiple related associations could potentially be used to take advantage of lower graduated corporate brackets. Attributing the income to individual homeowners and taxing each person according to his or her own rate would have created an administrative headache.
Congress needed a shortcut. It chose 30%.
The Senate Finance Committee’s published explanation doesn’t show an income survey, demographic analysis or calculation establishing that HOA and condo owners actually faced a 30% average marginal rate. Instead, the report reasoned that association members were “likely to be in higher tax brackets,” rejected passing the income through to individual homeowners as too complicated, and concluded that a flat 30% rate “may reasonably approximate the average marginal income tax rate of the members of these associations.”
It wasn’t based on what tax rate would allow reserve funds to keep pace with future capital costs. It doesn’t analyze long-term reserve funding, construction inflation or the investment limitations facing community associations.
In 1980.
The 30% provision didn’t originate with the Senate Finance Committee, it came over from the House. H.R. 7956, the Miscellaneous Revenue Act of 1980, already contained the provision establishing the 30% rate when the House passed it. The Senate Finance Committee report explicitly describes “tax rates applicable to nonexempt income of homeowners associations” as one of the provisions contained in the House bill. The Senate Finance Committee retained it.
The immediate legislative origin: House Ways and Means
H.R. 7956 was sponsored by Rep. Dan Rostenkowski of Illinois, then a senior Democrat on the House Ways and Means Committee. The House passed the bill on September 9, 1980; its accompanying report was House Report 96-1278.
The Justice Department later cited that House report along with the subsequent Senate report for the rationale behind 30%, describing §528 this way:
“…a flat 30% rate was chosen in part because HOA members were thought likely to occupy higher tax brackets.” (H.R. Rep. No. 96-1278, p. 27)
So the language apparently existed in the House Ways and Means legislative history before the Senate acted, if you’re looking to place blame.
What Do Rich Golfers Have To Do With It?
There’s a fun version of this history circulating that says Congress looked at homeowners associations, saw golf courses and tennis courts, assumed HOA residents were wealthy and consequently decided to tax their investment income at 30%. The actual Senate report doesn’t establish that exact connection, but golf courses and tennis courts really are mentioned. Swimming pools, too. But they were part of a discussion on association facilities capable of producing taxable income. If nonmembers paid to use an association’s golf course, tennis court or pool, for example, those receipts could constitute taxable nonexempt income.
Elsewhere, when discussing the appropriate tax rate, the committee said members of homeowners associations were likely to be in higher tax brackets. Those are two statements in the legislative history.
Congress didn’t say one caused the other, but that’s not proof that one didn’t influence the other, either.
For Condos, Federal Policy Is Now Pulling in Both Directions
The tax issue applies to qualifying HOAs and condominium associations nationwide.
Condominiums now add another layer to this saga.
After years of increasing concern about deferred maintenance, aging buildings and insufficient reserves, Fannie Mae and Freddie Mac have tightened condominium project standards (not applicable to HOAs). Beginning January 4, 2027, Fannie Mae and Freddie Mac project-review standards generally increase the standard minimum reserve allocation for applicable condominium projects from 10% to 15% of annual budgeted assessment income. Qualifying reserve studies can provide an alternative path, but the direction of federal housing policy is unmistakable. You can read about that here.
Building stronger reserves makes sense. A chronically underfunded building can postpone maintenance only until it can’t. When the bill finally arrives, owners can face enormous special assessments, loans, deferred projects and, increasingly, mortgage-financing problems.
- Federal housing policy is pushing condo associations toward stronger financial preparation for future capital obligations;
- But at the same time, federal taxation policy can simultaneously take 30% of the taxable income produced as those accumulated reserves earn interest.
The policies weren’t designed together. They come from different parts of the federal government, different statutes and very different eras. But condo owners experience them together.
The better funded an association becomes, the larger its reserve balance becomes. The larger the reserve balance, the greater its potential investment earnings. And the greater those taxable earnings become, the more consequential that 30% rate becomes.
One part of the federal system increasingly says: Save more.
Another still says: We’ll take 30% of the taxable earnings generated while you do it.
The Bill Eventually Finds the Homeowners
Investment income can sound like found money. For an HOA or condo association, it isn’t. Reserve interest is another source of funding for expenses the owners will eventually have to pay anyway.
Suppose an association determines that a major project will cost $3 million ten years from now. There are only so many places that $3 million can come from. Homeowners can contribute it. Investment earnings on their accumulated contributions can provide part of it. Or the association can borrow some of it, which means homeowners ultimately repay principal and interest. Taxing reserve earnings doesn’t make the future project cheaper. It changes how much of its cost can be met by the money homeowners already contributed. The tax doesn’t eliminate the obligation. It changes who ultimately has to fill the gap.
Changing Section 528 would, literally, take an Act of Congress
That doesn’t mean the rate should automatically be 21%, or 15%, or zero. Determining the appropriate treatment requires more than noticing that 30% looks high. But Congress already supplied the reason for revisiting it. The lawmakers who chose 30% said they were trying to approximate the tax burden association members would otherwise face.
That approximation was made in 1980. And forty-six years seems long enough to check the math.
Sources
Primary sources
- Senate Finance Committee, S. Rep. No. 96-1036, Miscellaneous Revenue Act of 1980 (Nov. 25, 1980). Confirms that the HOA tax-rate provision was already contained in H.R. 7956 as passed by the House before Senate Finance considered it. Contains the Senate’s explanation of the 30% rate and the “may reasonably approximate” language.
Senate Finance Committee report, S. Rep. 96-1036 - H.R. Rep. No. 96-1278, Miscellaneous Revenue Act of 1980 (1980), especially p. 27. The House Ways and Means report. Page 27 is cited by the Justice Department as the House source for the 30% rationale, including the conclusion that the rate could reasonably approximate association members’ average marginal income-tax rate.
- Public Law 96-605, Miscellaneous Revenue Act of 1980 (Dec. 28, 1980), §105. This is the enacted statute. H.R. 7956 became Public Law 96-605, and §105 changed §528 from the former highest-corporate-rate system to the flat 30% rate.
Public Law 96-605, official U.S. Code PDF - 26 U.S.C. §528, current statute and amendment history. The House’s official U.S. Code history confirms that the 1980 amendment replaced the previous highest-corporate-rate calculation with the 30% rate. It also confirms that §528 covers both condominium management associations and residential real-estate management associations.
26 U.S.C. §528, Office of the Law Revision Counsel - IRS, Form 1120-H FY 1980-81. The instructions explicitly state that the 1980 Act “decreased the tax rate for homeowners associations from 46% of taxable income to 30%.”
IRS 1980-81 Form 1120-H and instructions - U.S. Department of Justice, Solicitor General, American Society of Association Executives v. United States. DOJ described why Congress chose 30% and cited both H.R. Rep. 96-1278 at page 27 and S. Rep. 96-1036 at page 19. DOJ says the rate was chosen in part because HOA members were believed likely to be in higher tax brackets than the association.
DOJ Solicitor General brief
Additional Sources
- District of Columbia Office of Tax and Revenue. Form D-20, Corporation Franchise Tax Return and Instructions (Tax Year 2025). D.C. Office of Tax and Revenue, Form D-20
- Maryland General Assembly. Tax-General Article §10-101. Maryland Tax-General §10-101
- Maryland General Assembly.Tax-General Article §10-304. Maryland Tax-General §10-304
- Comptroller of Maryland. Business Income Tax Information. Maryland Comptroller
- Virginia Department of Taxation. Ruling of the Tax Commissioner No. 82-173 (Dec. 9, 1982). Virginia Tax Commissioner Ruling 82-173
- Virginia Department of Taxation.Virginia Corporate Income Tax. Virginia Department of Taxation
- Fannie Mae.Lender Letter LL-2026-03, Updates to Project Standards & Property Insurance Requirements (March 18, 2026). Fannie Mae LL-2026-03
- Freddie Mac.Single-Family Seller/Servicer Guide, Increase Replacement Reserve Requirements. Freddie Mac
