Michigan community associations are typically established as nonprofit corporations under state law. However, this designation does not automatically create an exemption from federal income taxes. To obtain such an exemption, an association would have to apply to the Internal Revenue Service (IRS) and be approved under a specific subsection of the Internal Revenue Code (IRC).
What is 501(c)(4)?
Section 501(c)(4) of the IRC pertains to federal tax exemption for social welfare organizations. According to the IRS, an entity may qualify under this Section if it is:
- A civic organization;
- Not organized for profit; and
- Operated exclusively for the promotion of social welfare – meaning primarily for the common good and general welfare of the community at large.
The reason community associations typically cannot meet this standard is that most are not “operated exclusively” for the promotion of social welfare, as the benefits are limited to the association members.
Recent Case Example: Mira Vista Homeowners Association
The Mira Vista Homeowners Association, Inc. (“Association”) is a nonprofit entity formed in 1988 to manage and maintain the Mira Vista development, a 700-acre gated residential community in Fort Worth, Texas. The Association oversees 96 acres of greenbelts, 25 miles of private streets, and recreational amenities such as a lake, playground, trails, and picnic areas. Membership is mandatory for property owners within the development.
The nearby Mira Vista Country Club, a separate §501(c)(7) organization, operates golf and sports facilities and occasionally hosts charitable events. Roughly half of its members are also homeowners in the Association.
In December 2019, the Association applied for tax-exempt status under §501(c)(4) (social welfare organizations). The IRS denied the request in February 2021, reasoning that the Association’s activities benefited only its members and their guests rather than the public at large. The IRS Appeals Office upheld the denial in April 2022, emphasizing that the Association did “not promote the social welfare or provide a community benefit because it does not allow public access.” The Association then petitioned the U.S. Tax Court for declaratory judgment.
Court’s Analysis
The United States Tax Court’s 2025 decision recognized Mira Vista as a civic, nonprofit organization but focused on whether it operated for the promotion of social welfare. The Association argued that its maintenance of roads, security patrols, and cooperation with city services lessened governmental burdens and thus benefited the general public. It also contended that similar gated associations in Texas had been granted §501(c)(4) status, implying unequal treatment.
However, the Tax Court found that:
- Access to Mira Vista’s facilities was limited to members, guests, and Country Club visitors.
- The public had no general right of entry, and the Country Club’s charitable events were unrelated to the Association’s operations.
- Any public benefit (e.g., from private patrols or infrastructure maintenance) was incidental and primarily served members’ private interests.
- The Association failed to show how its activities lessened governmental burdens or benefited the community as a whole.
Limitations on Tax-Exempt Status for Condominium Associations and Subdivision Associations
As with this case, most condominium associations and subdivision associations cannot meet the standard to qualify for tax exemption under 501(c)(4), as their operations generally serve a private membership rather than the public at large. To qualify under Section 501(c)(4), an organization must promote the welfare of the broader community, not just the collective interests of its members or property owners. This distinction is critical.
Associations typically exist to manage and maintain common areas and enforce restrictions and covenants for the benefit of the property owners within the community. While these activities may enhance property values, improve community appearance, and lessen governmental burdens, these benefits are incidental to the public and primarily accrue to the members themselves. The IRS views this as a private benefit, not a public or larger community benefit.
Being a nonprofit corporation under Michigan law does not automatically qualify condominium associations or subdivision associations for federal tax exemption. While there may be limited circumstances where it may make sense for an association to consider pursuing a 501(c)(4) exemption, be sure to consult with legal counsel and tax professionals before heading down that road.
You can read the full opinion of the Tax Court here.
article by Jeffrey L. Vollmer
Reprinted with permission from MAGWV, PLLC – Condominium & HOA Lawyers, Michigan
