Filing Form 1041 for a small condo trust - this seems way more complicated than it should be

Thanks for this breakdown! So just to make sure I understand - our $9000 total contributions go on Schedule E as income, not in boxes 3, 7 or 8 of the main 1041 form? And the Schedule E shows both the income (our contributions) and the expenses (water/sewer bills)? Also, if we operate as a "flow-through" entity, do we even need to file the 1041 at all? I'm trying to figure out if I'm doing unnecessary work.

Yes, your $9000 in contributions go on Schedule E as income to the trust. The Schedule E is where you'll show both the income (contributions) and the expenses (water/sewer). The bank fees would go on line 14 of the main 1041 form. Regarding whether you need to file - technically, yes. Even though you're a flow-through entity, the IRS still requires trusts with any gross income to file a 1041. However, many small condo associations operate as "homeowners associations" and might qualify to file Form 1120-H instead, which is simpler. You might want to look into whether your trust qualifies for that alternative.

Does it actually work with condo trust documents specifically? I'm in a similar situation and our trust docs are from the 1970s with weird legal language. Would it be able to interpret those correctly?

I'm skeptical about any AI tax tool. Did it explain the difference between a "traditional" condo trust and those structured as qualified 528 orgs that can file 1120-H? Those are treated completely differently tax-wise, and getting it wrong could cause problems.

It absolutely works with older condo trust documents. I uploaded our documents from 1986 and it identified all the relevant clauses and explained them in plain English. It even flagged provisions that might affect our tax status - things I never would have caught myself. For your question about qualified 528 organizations vs traditional trusts, that's exactly what it helped me determine. It analyzed our governing documents and asked specific questions about our operations to determine if we qualified for the 1120-H election. It explained that if at least 60% of our revenue was from membership dues and we met other requirements, we could use the simpler form with a flat 30% tax rate on non-exempt income.

How does this actually work? Do they somehow jump you ahead in the IRS phone queue? I find it hard to believe anyone can just magically get through to the IRS when I've been calling for weeks.

This sounds like BS honestly. No way some random service can get you to the front of the IRS line when I've been calling for 3+ hours multiple times. If it was that easy, everyone would do it. The IRS is fundamentally broken.

They don't "jump you ahead" in a queue - they use an automated system that continually calls the IRS for you and only connects when a human answers. It's basically doing what you'd be doing manually (calling, getting busy signals, calling again) but with technology handling the tedious part. The reason everyone doesn't do it is because most people don't know about it. I was skeptical too until I tried it. I had been trying to get through to the IRS for weeks about our condo trust filing questions, but their system got me connected within hours. The IRS agent I spoke with was incredibly helpful - she confirmed that our small condo association qualified to file the simpler 1120-H instead of the 1041 and explained exactly where our specific expenses should be recorded.

I've never even heard of Form 1120-H! Is this something we can just decide to use instead? Our situation is super simple (just 2 units, we each pay in equal amounts for water/sewer and nominal bank fees). Would we qualify for this?

Yes, this would be perfect for your 2-unit situation! Form 1120-H was specifically created for homeowners associations, including small condo associations like yours. You can elect to use it each year by simply filing it instead of the 1041. To qualify, you need to meet a few requirements: at least 60% of your income must come from member dues (which yours clearly does at 100%), and at least 90% of expenses must be for acquisition, management, or maintenance of association property (your water/sewer and bank fees qualify). The form is much simpler - basically just reporting exempt function income (your contributions) which isn't taxable, and any non-exempt income like interest, which is taxed at a flat 30% rate.

This is the most important question actually! I work in real estate law and many "condo trusts" in places like Massachusetts are legally structured as trusts but in other states they're almost always corporations. The tax forms are completely different depending on the legal structure.

This is incredibly helpful! I had no idea Form 1120-H was even an option. Your explanation about the 60% income test and 90% expense test makes perfect sense for our situation - we're definitely 100% member dues and our expenses are clearly for property maintenance. Quick follow-up question: when you say "pulling trust documents to confirm legal structure," what specifically should I be looking for? Our condo was set up in the 1990s and I inherited this paperwork mess when I became the unofficial "treasurer." I want to make sure we're actually structured as something that can elect 1120-H treatment before I abandon the 1041 route entirely. Also, is this an election we make just by filing the 1120-H, or do we need to notify the IRS separately that we're switching from 1041 to 1120-H?

Great questions! When reviewing your trust documents, look for language that establishes it as either a "condominium trust," "homeowners association," or similar entity organized for the collective benefit of unit owners. The key is that it should be organized and operated primarily for the benefit of members rather than for profit. You'll want to confirm that your organization is either: (1) a condominium management association, (2) a residential real estate management association, or (3) a timeshare association. Most condo trusts from the 1990s fall into category 1. Regarding the election - it's beautifully simple! You make the Section 528 election just by filing Form 1120-H instead of Form 1041. No separate notification needed. You can switch back and forth year to year if needed, though most associations stick with 1120-H once they discover how much easier it is. One thing to double-check: make sure your trust doesn't have significant investment income beyond member dues. If you have substantial interest, dividends, or rental income, that could affect the qualification, though your bank fees and member assessments situation sounds textbook perfect for 1120-H treatment.

This is exactly the kind of clear explanation I needed! I've been banging my head against the wall trying to figure out trust accounting when apparently I should be looking at homeowner association rules instead. One quick clarification - when you say I make the election "simply by filing 1120-H instead of 1041," does that mean I can just abandon my partially completed 1041 in TaxAct and start fresh with 1120-H? Or do I need to somehow notify the IRS that I'm switching forms for this tax year? Also, since this is our first year filing (we just formalized our arrangement in 2024), would there be any issues with starting with 1120-H right away, or should I stick with 1041 for consistency and switch next year?