Every year, your HOA holds its annual meeting, and buried in the agenda is a confusing line item that reads something like this:
Vote to apply excess membership income to the following year’s budget or refund it to members: IRS Revenue Ruling 70-604.
Most homeowners glance at it, shrug, and move on, but what you might not realize is that this single vote could determine whether your community saves thousands in taxes, or hands that money straight to the IRS.
Let’s unpack what IRS Revenue Ruling 70-604 really means, what happens if you vote for or against it, and why this decision matters more than most people think.
What Is IRS Revenue Ruling 70-604?
Back in 1970, the IRS issued a ruling — Revenue Ruling 70-604 — to clarify how homeowners associations can handle surplus membership income.
In simple terms, it allows an HOA to avoid paying federal income tax on leftover funds from dues, fees, or assessments by either:
- Applying the surplus to next year’s expenses, or
- Refunding it directly to members.
It’s a form of tax relief designed for mutual-benefit nonprofit corporations — but here’s the catch: the IRS doesn’t automatically apply it. The membership (that means homeowners, not just the board) must vote to approve it annually.
Why It Exists: The IRS’s View of HOAs
The IRS generally views HOAs as corporations, not charities. That means HOAs can be taxed on any “non-exempt” income, such as interest, clubhouse rentals, or other revenue not directly tied to operating the association.
Since most HOAs operate on a cost-sharing model (you pay dues to maintain common areas, not generate profit), Revenue Ruling 70-604 provides a practical way to keep things tax-neutral when there’s a surplus.
Voting For 70-604: What Happens
When homeowners vote in favor of adopting Revenue Ruling 70-604, they’re essentially authorizing the HOA to roll over or refund any surplus income, keeping it out of taxable reach.
Practical benefits include:
- ✅ Tax avoidance: The HOA won’t owe taxes on excess assessments.
- ✅ Smoother budgeting: Extra funds can offset next year’s dues.
- ✅ Transparency and accountability: It formalizes how surpluses are handled instead of leaving the decision solely to the board.
- ✅ Compliance clarity: Auditors and tax preparers prefer a clear member vote for 70-604.
Homeowner takeaway:
If your HOA consistently ends each year with a positive balance, voting for 70-604 helps ensure those funds benefit the community, not the IRS.
Voting Against 70-604: What That Means
If the membership votes against adopting Revenue Ruling 70-604 (or simply fails to vote at all), the HOA loses this tax-safe harbor.
Possible implications:
- ⚠️ Tax exposure: Surplus funds could be considered taxable income.
- ⚠️ Administrative confusion: The board must find another legal way to justify retaining the surplus.
- ⚠️ Reduced flexibility: Unspent funds may be “trapped” until proper tax treatment is determined.
- ⚠️ Potential higher dues later: If the HOA pays taxes on surplus income, homeowners may end up covering that loss in next year’s budget.
Homeowner takeaway:
A “no” vote isn’t necessarily wrong, but it requires a clear plan for handling extra funds. Without one, the HOA risks unnecessary taxation or bookkeeping headaches.
Common Myths About Revenue Ruling 70-604
❌ “It’s a refund.”
Not always. It can authorize refunds, but most HOAs simply roll the funds over to reduce next year’s dues.
❌ “The board can vote for it.”
Incorrect. The IRS expects the membership to make the election each year — not the board acting alone.
❌ “It’s automatic once adopted.”
No. The vote must occur annually. Failing to document the decision can nullify the election.
❌ “It doesn’t matter if our HOA files under 1120H.”
Actually, it still matters. Even HOAs using IRS Form 1120H benefit from 70-604 to clarify how they handle excess assessments and maintain compliance.
Why Homeowners Should Care
Most people never think about their HOA’s tax strategy, until a financial shortfall or special assessment hits. Voting on 70-604 may seem like small administrative housekeeping, but it’s really about protecting collective homeowner funds.
Here’s why it matters to you:
- Your dues directly fund the HOA’s operations.
- Any tax paid on unspent funds is ultimately paid by you.
- Voting properly on 70-604 keeps your money working for your community, not for the IRS.
When Boards Mismanage the Vote
Some HOAs forget to include the 70-604 vote on their annual agenda, assume the CPA will “handle it,” or misunderstand what it covers. That can cause:
- Retroactive tax liabilities
- Auditing complications
- Homeowners questioning transparency
If your board hasn’t mentioned the ruling in years, that’s a sign it’s time to start asking questions.
The Emotional Undercurrent: Confusion, Frustration, and Distrust
For many homeowners, these issues stir something deeper than accounting frustration. It’s the growing sense of being left out of decisions that directly affect your money.
When boards don’t explain why something matters, or how it protects the community, it reinforces the feeling that HOA finances are a mystery. Understanding 70-604 is one small but powerful way to start changing that.
How to Approach the Vote Strategically
If this item appears on your next annual meeting ballot:
- Ask for clarity: Where will the funds go if approved?
- Check your governing documents: Ensure the HOA is permitted to carry over funds.
- Review the financials: How much surplus is actually on hand?
- Document the outcome: The CPA or tax preparer must have written evidence of the member vote.
Homeowners who understand 70-604 aren’t just voting on a tax issue, they’re voting on how their community handles accountability.
Empowerment Starts with Knowledge
Most HOA frustration comes from uncertainty, not knowing what’s normal, what’s legal, or what’s optional. That’s where tools like the HOA Victory Kit help homeowners uncover the truth behind HOA finances, rules, and hidden fees.
It’s not about confrontation. It is about clarity.
If you’re ready to understand how decisions like 70-604, reserve funding, and special assessments really affect your pocketbook, visit https://www.hoavictorykit.com/ and download your HOA Victory Kit today.