What Are the Pros & Cons of Forming a Homeowner's Association?

Taxation

One con of forming a homeowner's association is that the association itself must pay taxes. According to the U.S. Code, the standard tax rate for a homeowner's association is 30 percent. Income that the homeowner's association receives from members' fees or dues is exempt from income taxes if the homeowner's association uses these fees to perform services such as lawn cutting and trash cleanup. If the homeowner's association runs a restaurant and earns income by selling meals however, this income is taxed at 30 percent. At least 90 percent of the money the homeowner's association spends during the year must be used to provide services such as maintenance and property management for the association to qualify for this exemption.

Another con of forming a homeowner's association is that it charges an additional fee to real estate owners in the area it governs. According to the University of North Carolina, membership in the homeowner's association is usually mandatory. A fee may be as high as several hundred dollars per month, depending on the additional services that the homeowner's association provides.

Some benefits of forming a homeowner's association are that it can bargain for services such as trash collection, street repair and park maintenance. The homeowner's association may be able to negotiate a lower price for these services than the city would normally charge, and the city may exempt the residents from taxes if they pay for their own services. The association may provide other benefits, such as protection by private security guards that residents of other neighborhoods do not receive.

A con is that the homeowner's association needs to collect fees from all residents to function properly. A city has many sources of income that allow it to perform services such as trash collection and road maintenance. According to the University of Nevada, Las Vegas, the foreclosure crisis led to severe service cutbacks for many residents of areas that homeowner's associations govern, because there are fewer residents paying the dues necessary to provide these services.

A pro is that homeowner's associations can close off an area to the general public. The roads in the neighborhood may be private, so non-residents cannot drive on them. This reduces road maintenance costs, as well as noise and traffic related dangers. Gated communities physically prevent anyone from accessing the neighborhood without permission from one of its residents. Residents often prefer a protected area because of concerns about crime.