When could a homeowners' or property owners' association qualify for the former Texas franchise-tax exemption, and was there a fixed percentage of lots that had to be sold?

Plain-English summary

There was no universal percentage of lots that had to be sold before an association could request exemption. The association had to satisfy residential-purpose and voting-control tests based on its own governing documents and ownership facts.

The Comptroller listed four requirements under Section 171.082 and Rule 3.541(c)(6):

1. The association had to be a nonprofit corporation.
2. It had to be organized and operated primarily to obtain, manage, construct, and maintain property in a residential condominium or residential real-estate development.
3. Owners of individual residential lots, residences, or units collectively had to control at least 51% of the votes, and that control could not be held by a single individual or family, developers, declarants, banks, investors, or similar parties.
4. The condominium project or development had to be legally restricted to residential use.

The response also listed supporting documents: file-stamped articles of incorporation, a file-stamped declaration and plat map, bylaws when necessary, and an ownership list showing names, addresses, acquisition dates, total lots or units, and when resident owners gained 51% voting control.

Whether enough property had been sold depended on the declaration's voting rules and who actually held the votes. Developer control ending did not automatically mean resident owners had 51%. Builder, investor, lender, and extra investment lots could prevent particular votes from counting toward resident-owner control.

For a request filed more than 15 months after the last day of the corporation's charter month, acquisition dates or other proof of when resident owners obtained voting control were essential if the taxpayer sought an exemption earlier than the next privilege period. Without that proof, the response said exemption could be granted only prospectively.

What this means for you

Homeowners' and property owners' associations

Do not rely only on the percentage of units sold or on the developer's loss of control. Review the declaration, classes of membership, votes per lot, actual owners, and whether the property is legally restricted to residential use.

Associations seeking an earlier effective date

Ownership dates matter. The response required documentation showing when resident owners acquired the necessary voting control if a late application sought earlier treatment.

Common questions

Q: Was there a fixed percentage of lots that had to be sold?
A: No. The answer depended on the declaration's voting provisions and actual ownership.

Q: Was loss of developer control enough?
A: No. Individual residential owners still had to hold at least 51% of the votes.

Q: Did investment or builder-owned lots count toward resident control?
A: The response says those lots did not count toward the individual resident owners' 51% control.

Citations and references

• Texas Tax Code Sec. 171.082 - exemption for certain homeowners' associations
• 34 Tex. Admin. Code Sec. 3.541(a) - exemption application process
• 34 Tex. Admin. Code Sec. 3.541(c)(6) - homeowners' association requirements

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200002329L

Original ruling text

February 23, 2000

**,

In answer to your request for a website that discusses the franchise tax
exemption under Section 171.082 for certain homeowners' associations, the
following information should be helpful.

This website should get you to the Window on State Government.

http://www.window.state.tx.us

From the Window on State Government, select the heading "Texas Taxes". Then
under "Texas Tax Laws and Rules", select "Tax Code at the Legislative Council".
On the following screen there is a Table of Contents, scroll down and select
"Tax Code". And on the next screen, scroll down to "Subtitle F. Franchise Tax"
and select "Chapter 171.Franchise Tax". After following these steps, Chapter
171 of the Tax Code will be displayed, and the exemption for homeowners'
associations can be found by scrolling down to "Sec. 171.082 Exemption--Certain
Homeowners' Associations".

This website for Section 171.082 is a copy of the Texas statute that outlines
the exemption for Homeowners' Associations.

For a copy of the franchise tax rule (Rule 3.541) that further addresses the
exemption for homeowners' associations, return to the screen that shows the
heading "Texas Tax Laws and Rules". Scroll down and select the heading, "The
Franchise Tax". Scroll down and select the heading, "Franchise Tax Rules from
the Texas Administrative Code at the Texas Secretary of State". Then select
3.541, Exemptions.

This site is a copy of Franchise Tax Rule 3.541. Section (a) of this rule
discusses the application process for requesting a franchise tax exemption, and
Section (c)(6) further addresses the specific requirements of a homeowners
association to be considered for franchise tax exemption under Section 171.082
as a homeowners association.

The following is an outline of the requirements a homeowners' association must
meet before it may be considered for exemption from the franchise tax under
Section 171.082.

I. Must be a nonprofit corporation;

II. Corporation must be organized and operated primarily to obtain, manage,
construct, and maintain property in or of a residential condominium or
residential real estate development;

III. Owners of individual lots, residences, or residential units collectively
must control at least 51 percent of the votes of the corporation; provided,
however, that voting control, however acquired, is not held by:

A. a single individual or family; or
B. one or more:

1. developers
2. declarants
3. banks
4. investors, or
5. other similar parties; and

IV. Condominium project or real estate development must be legally restricted
for use as residences.

The following information cannot be found on a website, but it lists the
documentation that must be submitted when a corporation requests franchise tax
exemption as a homeowners' association.

Photocopies of Supporting Documents Required When Requesting Franchise Tax
Exemption For A Homeowners' Association:

I. Articles of Incorporation (File-stamped as official records)

II. Declaration and plat map (File-stamped as official records)

III. Bylaws *

IV. List of individual lots or units giving the owner's name, address, and the
date the owner acquired title to the property. Also include the total number of
lots or units within the real estate development and date the individual
resident owners gained 51% voting control of the association. **

• If the articles of incorporation or declaration, alone or in combination,
  specifies the qualifications for membership; the classes of membership and the
  attendant voting rights for each membership class; and the events, if any,
  resulting in the termination or the reinstatement of a membership class, a
  photocopy of the bylaws is unnecessary.

** The dates the owners acquired title to the individual properties are
unnecessary if the request is submitted within the first 15 months after the
last day of the calendar month in which the corporation's charter is dated.
If, however, a request for exemption is submitted beyond the 15-month period
and the taxpayer seeks the exemption effective as of a date earlier than the
date of the beginning of the next privilege period, the dates are essential.
Without the dates the owners acquired title to the separate properties, or
other documentation proving when the owners acquired the requisite voting
control, an exemption may only be granted prospectively.

In reference to your question about the portion of the real estate development
that must be sold before the corporation can request exemption from the
franchise tax, the factors can be different for each corporation.

Your Question: "How much of a new Homeowners' Association or Property Owners'
Association has to be sold before you can request a franchise tax exemption?

This issue varies for each homeowners' association because it depends on the
language in the Declaration regarding the voting rights. The Declaration
generally contains language that dictates when the Developer or Declarant will
no longer have voting control over the association/corporation. Some examples:

i.e. The Developer or Declarant retains voting control until a certain amount
of lots/units are sold.

i.e. The Developer or Declarant may have (3) three or more votes per lot/unit
while all other owners have (1) vote per lot/unit, resulting a situation
requiring a certain percentage of the lots/units to be sold before the
Developer or Declarant loses the voting control.

In addition to the language in the Declaration regarding the voting rights and
determining whether the Developer or Declarant no longer have the voting
control, you have to determine if the individual resident owners have gained
the 51% voting control, and if so, as of what date. Also, keep in mind that
just because the Developer or Declarant no longer has voting control over the
association, it does not automatically mean the individual resident owners
would have 51% voting control. Some examples that might cause the individual
resident owners not to have 51% voting control of the association:

i.e. There may be multiple lots/units owned by some of the individual
resident owners and they would only have one lot/unit counted as their
residential lot, and the other lots owned by the individual resident owner
would be considered investor owned lots/units and not count toward the 51%
voting control. (In some situations, the individual resident owner may be
entitled to count two of the lots he/she owns as part of their residential
property, but it would require an additional statement explaining the
circumstances.)

i.e. There may be builders or investors that have purchased some of the
lots/units to be resold, or even lots/units that have been through foreclosure
and are in the possession of lender. These lots/units would not count toward
the 51% voting control of the individual resident owners.

As you can see from the information I have provided in this E-mail response,
each request for exemption as a homeowners' association is a different
situation and you have to look at the facts for each situation to determine the
results.

I apologize for the length of this response. I hope the information will be of
assistance to you. If you have any questions, please give me a call. I can be
contacted toll free at 1-800-531-5441, extension 3-4142, or my direct line is
512/463-4142.

Wanda Carter