Section 1.528-6 - Expenditure test(a)In general. An organization cannot qualify as a homeowners association under section 528 for a taxable year unless 90 percent or more of its expenditures for such taxable year are qualifying expenditures as defined in paragraphs (b) and (c) of this section. The determination of whether an organization meets the provisions of this section shall be made after the close of the organization's taxable year. Investments or transfers of funds to be held to meet future costs shall not be taken into account as expenditures. For example, transfers to a sinking fund account for the replacement of a roof would not be considered an expenditure for the purposes of this section even if the roof is association property. In addition, excess assessments which are either rebated to members or applied against the members' following year's assessments will not be considered an expenditure for the purposes of this section.(b)Qualifying expenditures. Qualifying expenditures are expenditures by an organization for the acquisition, construction, management, maintenance, and care of the organization's association property. They include both current operating and capital expenditures on association property. Qualifying expenditures include expenditures on association property despite the fact that such property may produce income which is not exempt function income. Thus expenditures on a swimming pool are qualifying expenditures despite the fact that fees from guests of members using the pool are not exempt function income. Where expenditures by an organization are used both for association property as well as other property, an allocation shall be made between the two uses on a reasonable basis. Only that portion of the expenditures which is properly allocable to the acquisition, construction, management, maintenance or care of association property, shall constitute qualifying expenditures.(c)Examples of qualifying expenditures. Qualifying expenditures may include (but are not limited to) expenditures for:(1) Salaries of an association manager and secretary;(6) Upkeep of tennis courts;(8) Recreation rooms and halls;(9) Replacement of common buildings, facilities, air conditioning, etc;(10) Insurance premiums on association property;(12) Improvement of private property to the extent it is association property; and(13) Real estate and personal property taxes imposed on association property by a State or local government.T.D. 7692, 45 FR 26322, Apr. 18, 1980