Why Most Homeowners Associations Cannot Qualify as Tax Exempt Social Clubs
When a Homeowners Association Loses Its Claim to Tax Exempt Status
Many homeowners associations assume that offering amenities such as pools, clubhouses, or community events automatically allows them to qualify as tax exempt social clubs. A recent IRS Private Letter Ruling issued in January 2026 shows why that assumption is often incorrect and why the day to day activities of an association matter far more than its stated purpose.
In Private Letter Ruling 202604002, the Internal Revenue Service concluded that a homeowners association did not qualify for exemption under Internal Revenue Code Section 501(c)(7). That provision applies only to organizations that are organized and operated exclusively for pleasure, recreation, and other nonprofitable purposes. The IRS determined that the association failed this standard based on how it actually operated.
What the Association Actually Did
Although the association claimed to function as a social club, the IRS focused on its core activities. These included maintaining roads and pavements within the development, enforcing architectural and use restrictions, providing private security services, and exercising governance authority over homeowners. In substance, the association operated as a residential property management entity rather than a recreational organization.
The IRS emphasized that these services primarily benefit property ownership and residential living. They do not further pleasure or recreation in the way required for a social club exemption. Even if recreational amenities exist, they cannot outweigh substantial non recreational functions.
Why Recreational Amenities Are Not Enough
Prior IRS rulings have allowed exemption only where an association’s activities are narrowly limited to operating social or recreational facilities. Once an organization takes on responsibilities such as infrastructure maintenance, covenant enforcement, or security, it crosses a line. At that point, the organization is serving the private interests of property owners rather than operating for social purposes.
In this ruling, the IRS relied on long standing administrative guidance and court decisions holding that homeowners associations performing residential maintenance and enforcement functions are not eligible for treatment as social clubs. The presence of recreational facilities did not change that outcome.
The IRS Final Determination
Because the association failed both the organizational and operational tests under Section 501(c)(7), the IRS issued a final adverse determination. The organization was denied tax exempt status and treated as a taxable entity for federal income tax purposes.
Key Takeaway for Homeowners and Boards
This ruling is a reminder that tax exempt status is determined by substance, not labels. Homeowners associations that function as governing or maintenance bodies should not assume they qualify as social clubs for tax purposes. To preserve exemption, activities must be tightly confined to social and recreational functions, with residential services excluded or handled through separate taxable entities.
For associations and boards, understanding this distinction can prevent unexpected tax exposure and costly compliance issues.
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