Can an HOA accept donations or run a fundraiser?
By OurHOA · General information · Revised
An HOA can take donations and hold fundraisers, but the money becomes association property, the tax treatment shifts, and raffles are separately regulated.
Yes, and the first question is whose money it becomes
Nothing stops an association from accepting a gift or holding an event that raises money, and plenty do: a playground drive, a memorial bench, a community garage sale where the tables are rented, a holiday party that sells tickets. The consequence people skip is that once the association accepts the funds, they are association property. They belong in an association bank account, on the association's books, in the financial statements owners are entitled to see, and under the same fiduciary duty that governs assessment money. The recurring failure is the social committee fund living in a volunteer's personal checking account or payment app, which is not a separate organization and not the volunteer's money, and which produces a genuinely ugly situation when that volunteer moves away or a dispute starts. If the community wants a fund the association does not control, the answer is to form a separate entity for it, with its own officers and its own bank account, not to leave money in a personal account and call it informal.
The donor does not get a charitable deduction
Boards send thank-you letters that look like charitable acknowledgments, and donors then try to deduct the gift. They cannot. IRS Publication 526, under the heading for contributions to nonqualified organizations, lists homeowners' associations among the organizations whose contributions are not deductible. The reason is structural rather than punitive: a typical association is a nonprofit mutual benefit corporation existing to serve its own members, not a charity organized for public benefit, and even an association that has obtained a state or federal exemption from income tax is generally not an organization that can receive deductible contributions. So do not put language in a solicitation implying otherwise, do not issue a receipt that states the gift is tax deductible, and if a donor asks, say plainly that the deduction is not available and point them to their own tax preparer. Overstating this is the kind of error that costs the association credibility over a five hundred dollar bench.
What non-member money does to the association's tax return
Most associations file Form 1120-H under Internal Revenue Code section 528, which taxes only the income that is not exempt function income. Section 528 defines exempt function income as any amount received as membership dues, fees, or assessments from owners, and a voluntary donation is none of those three things, so it lands on the taxable side along with interest, laundry income and clubhouse rentals. That income is then taxed at the section 528 rate of 30 percent, after deductions directly connected with producing it and a specific deduction of 100 dollars under section 528(d)(2)(A). The bigger risk is the eligibility test rather than the rate: section 528 requires that 60 percent or more of gross income for the year consist solely of dues, fees and assessments from owners, and that 90 percent or more of expenditures go to the acquisition, construction, management, maintenance and care of association property. A single large fundraising year in a small association can put gross income the wrong side of that 60 percent line, and an association that drops off 1120-H files a regular corporate return instead, where Internal Revenue Code section 277 limits deductions attributable to furnishing services to members to the extent of income derived from members. Run the numbers past the association's accountant before the event, not at filing time. Our guide on whether an HOA has to file a tax return covers the choice between the two returns in more detail.
Raffles and anything where people buy a chance
Selling chances is gambling unless a statute says otherwise, and the exceptions are narrower than volunteers expect. California is a useful illustration because it spells the conditions out. Penal Code section 320.5 permits a raffle only by an eligible organization, defined as a private nonprofit that has been qualified to conduct business in the state for at least one year and is exempt from taxation under one of a listed set of Revenue and Taxation Code provisions. That list includes section 23701t, which covers homeowners' associations meeting the same 60 percent income and 90 percent expenditure tests as the federal rule, so a California association is not categorically excluded. It still has to have actually obtained that exemption, which many associations never applied for, it has to register annually with the Department of Justice, and at least 90 percent of the gross receipts from the draw must be used to benefit or support beneficial or charitable purposes. That last condition is the one that bites, because raising money for your own community's playground is not obviously a charitable purpose, and the answer is worth getting from counsel or from the registration program before tickets are printed. Other states put raffles under their own charitable gaming statutes with different eligibility, different registration and different caps. A 50-50 drawing at the summer picnic is a raffle in most of them. Free-entry drawings and straightforward sales of food, shirts or bricks avoid the problem entirely.
Restricted gifts, benches and the maintenance you inherit
A donor who hands over money for a specific purpose has created an expectation the board has to manage, and the time to write down the terms is before the check is deposited. Put four things in the acceptance resolution: the stated purpose, what happens to any surplus, what happens if the project is abandoned or the cost comes in higher than the gift, and whether the donor receives any recognition and on what terms. Naming rights and memorial plaques deserve particular care, because a plaque is a promise about the future that a future board has to keep or publicly break. Physical gifts carry a longer tail than the price tag suggests. A donated bench, tree, playground structure or fountain becomes association property the moment it is installed, which means the association now insures it, maintains it, replaces it at the end of its life and funds that replacement in reserves. A twelve hundred dollar bench that needs refinishing every four years and replacement in fifteen is a small permanent line item the association took on in exchange for a one-time gift. That is often still worth doing; it just should be a decision rather than a surprise, and the reserve study should be updated to reflect it.
How to run one cleanly
A workable sequence keeps this out of trouble. Approve the event or the gift by board action recorded in the minutes, including who is authorized to sign and spend. Open no new accounts outside the association's control; the money goes into the association's bank account and is coded to its own income line so it never blends into assessment revenue. Track event expenses against event income so the financial statements show what the effort actually netted, and report that figure to the membership even when it is disappointing. Check the insurance before the event rather than after, including whether a special event endorsement or a vendor certificate is needed, and check whether the jurisdiction requires a permit for a street closure, amplified sound, food service or alcohol. If goods are being sold, ask the accountant about sales tax and registration, which several states apply to occasional nonprofit sales. And keep one strategic point in front of the board: an amenity funded by donations still generates permanent common expenses for insurance, maintenance and eventual replacement, so the gift is the beginning of the cost rather than the end of it. Our guide on how to read HOA financials shows where non-assessment income and the new expense should appear once the event is over.
Sources
- 26 U.S.C. 528: certain homeowners associations, including the definition of exempt function income and the 60 percent and 90 percent tests
- 26 U.S.C. 277: deductions incurred by certain membership organizations in transactions with members
- IRS Publication 526, Charitable Contributions: contributions to nonqualified organizations
- California Penal Code 320.5: eligible organizations, registration and the 90 percent requirement for raffles
- California Revenue and Taxation Code 23701t: exemption for homeowners' associations
These guides are general education for HOA boards and residents, not legal, tax, or financial advice. Rules vary by state and by your community's governing documents - check with a professional for your situation.