506 Master Associations

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506 Master Associations
2010-10-18 19:44:10

Chapter 5
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  1. 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.
  2. 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.)
  3. 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.
  4. 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.
  5. 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).
  6. 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.