Texas Law · Compliance & Operations · Urgent / Time-Sensitive

Is Your Texas Association Compliant? The Six State Obligations Boards Cannot Afford to Miss

Budget season is approaching. Before the board adopts next year’s budget, every Texas community association should run a six-point compliance audit. A single missed filing can produce thousand-dollar daily penalties, forfeited attorney’s-fee recovery, and personal director exposure. The good news: each obligation is fixable. The bad news: most are time-sensitive, and the cost of catching them late is dramatically higher than catching them in time.

The Compliance Question Most Boards Avoid

Every Texas community-association board faces a hard moment about once a year. The treasurer is preparing the budget. The president is thinking about reports for the annual meeting. The manager is finalizing vendor renewals. And somewhere in the background, the question that does not get asked nearly enough surfaces: are we actually compliant with our state and federal obligations?

It is an uncomfortable question because the answer is often “we’re mostly compliant, but...” And because the obligations are scattered across multiple agencies, statutes, and deadlines, the work of confirming compliance is rarely on any one director’s list. The TREC management certificate is supposed to be the manager’s job. The franchise tax is supposed to be the CPA’s job. The governing documents are supposed to be counsel’s job. The reserve study is supposed to be the reserve specialist’s job. In well-run associations, it all gets done. In the rest, gaps accumulate quietly for years until one of them produces a phone call from a regulator, a court, or a lender.

This article is the audit your board should run before the next budget cycle. Six obligations. Each one carrying material penalties if missed. Each one fixable if surfaced in time.

Compliance gaps don’t produce immediate consequences — they produce delayed consequences with compound interest.

Obligation #1: Corporate Filings Current with the Secretary of State

Virtually every Texas community association is organized as a nonprofit corporation under Texas Business Organizations Code Chapter 22. The corporation has ongoing filing obligations with the Texas Secretary of State and the Comptroller of Public Accounts that, if neglected, can result in forfeiture of the corporation’s right to do business in Texas.

What Needs to Be Current

• Registered agent and registered office. The association must maintain a current registered agent and a registered office in Texas (TBOC §§ 5.201–5.206). The registered agent is the contact point for service of process and official communications.
• Articles of incorporation. Original articles plus any amendments. The Secretary of State’s file should accurately reflect the association’s current name, purpose, and structure.
• Public Information Report (PIR). Required annually with the franchise tax return, even when the association is exempt from franchise tax. The PIR identifies current officers and directors.

What Goes Wrong

The Fix

Pull the entity record from the Texas Secretary of State’s SOSDirect online system. Confirm registered agent, registered office, and articles are current. Pull the Comptroller’s Taxable Entity Search to confirm the association is in “active” status with current PIR filings. Update anything stale. This is a 30-minute administrative check that prevents a category of avoidable disasters.

Obligation #2: TREC Management Certificate Filing (SB 1588)

Texas Senate Bill 1588, passed in the 87th Legislative Session (2021), created a major new compliance obligation: every Texas residential property owners’ association must file its management certificate with the Texas Real Estate Commission (TREC) through the TREC management-certificate database at hoa.texas.gov, in addition to the long-standing requirement to record the certificate in the county real-property records under Texas Property Code § 209.004.

The Filing Timeline

The Penalties

The Fix

Visit hoa.texas.gov. Search for the association by name or address. If the certificate is on file, confirm the information is current. If it is not on file — or if the information is out of date — file or amend immediately. The filing is free; the cost of non-compliance is not.

Obligation #3: Federal Tax Filing (Form 1120-H or 1120)

The IRS treats community associations as taxable entities even when they are nonprofit corporations under state law. Every Texas community association must file an annual federal income tax return. The two principal options:

Form 1120-H (the Common Choice for HOAs)

Internal Revenue Code § 528 permits qualifying community associations to elect a simplified tax treatment via Form 1120-H. The election produces:

• Exempt-function income (assessments paid by members for association purposes) excluded from taxable income.
• Non-exempt income (interest, vending, transient occupancy, non-member fees) taxed at a flat 30% rate for HOAs and condominium management associations.
• Simpler return preparation than the standard corporate return.

To qualify for Form 1120-H, the association must meet two key tests:

• 60% gross-income test: at least 60% of the association’s gross income for the tax year must consist of exempt function income (member assessments, etc.).
• 90% expenditures test: at least 90% of the association’s expenses must be expenses to acquire, build, manage, maintain, or care for association property.

Form 1120 (the Standard Corporate Return)

Associations that do not elect 1120-H treatment (or that do not qualify) must file Form 1120 — the standard corporate income tax return. The treatment can be more favorable in certain circumstances (e.g., when investment income is significant), but the filing is more complex and the election should be reviewed with a CPA familiar with community-association taxation.

Deadlines and Penalties

For calendar-year associations, Form 1120-H is due April 15 (or the next business day). Extensions are available through Form 7004 (typically six months). Late filing penalties and interest accrue under standard IRS rules. The choice between 1120-H and 1120 is made annually; an election to file 1120-H is generally irrevocable for that year.

Obligation #4: Texas Franchise Tax Filing

Texas levies a franchise tax on entities doing business in the state. Community associations are subject to the franchise tax unless they qualify for and obtain an exemption from the Texas Comptroller.

Exemption

A Texas community association can be exempt from franchise tax if it is also exempt from federal income tax under specific IRC sections — including IRC §§ 501(c)(4), (c)(7), and several others. The federal exemption is typically obtained through a separate application process (Form 1024 or 1024-A) and is not automatic.

The state-level franchise tax exemption application is filed with the Comptroller using Form AP-206 (Texas Application for Exemption — Homeowners’ Associations) along with supporting documentation.

If Not Exempt

An association that is not exempt must file the Texas Franchise Tax Report annually with the Comptroller, typically by May 15 each year. Even associations claiming exemption must file an annual Public Information Report (PIR) identifying current officers and directors.

What Goes Wrong

Obligation #5: Governing Documents Updated for the Last Decade of Legislative Changes

Texas community-association law has changed substantially over the past decade. The 86th Legislature (2019), 87th Legislature (2021), 88th Legislature (2023), and subsequent sessions have produced significant amendments to Property Code Chapter 209 (HOAs), Chapter 82 (TUCA condominiums), and adjacent frameworks. Key legislative developments include:

• SB 1588 (2021): 27 sections affecting POAs, including the TREC management certificate framework, the records-request response process, candidate-solicitation requirements (§ 209.00593), and a substantial revision of enforcement procedures.
• HB 614 (2023): Restrictions on fining authority and procedural requirements for fines.
• Display-rights legislation: Solar device protections (§ 202.010), flag display rights, religious-display protections.
• Records-access refinements: Updates to the § 209.005 framework, the records production policy requirement, and the recorded fee schedule.
• Director eligibility and election refinements: Refinements to the candidate-solicitation timeline and the mandatory-election framework under § 209.014.

Many association declarations and bylaws were drafted before these changes — sometimes decades before. The documents may reference repealed statutes, contain provisions that conflict with current law, or lack provisions for modern operational reality (electronic notice, virtual meetings, electronic voting).

The Modernization Project

A governing-documents modernization project typically includes:

• Counsel review of the declaration, articles of incorporation, and bylaws against current statute.
• Identification of provisions that are outdated, in conflict with current law, or missing.
• Drafting of proposed amendments to bring the documents into alignment.
• Owner education and the supermajority owner vote required for declaration amendments (bylaws and policy amendments typically have lower thresholds).
• Re-recording of the amended declaration in the county real-property records.
• Updates to the management certificate filings to reflect any structural changes.

Best practice is to revisit the governing documents every 7–10 years. Associations operating from 1990s or early-2000s documents are typically due. The cost is modest relative to the operational benefit and the avoided litigation exposure.

Obligation #6: Reserve Study — Budget Season Is Coming

Texas does not have a state statute requiring reserve studies for HOAs or condominium associations (unlike Florida’s post-Surfside SIRS framework under § 718.112(2)(g)). But:

• Most well-drafted declarations and bylaws contain reserve-study requirements that are independently binding on the association.
• Lender warrantability standards (Fannie Mae, Freddie Mac, FHA, VA) increasingly require recent reserve studies for condominium and PUD warrantability.
• Fannie Mae and Freddie Mac 2026 changes raise the reserve-funding allocation requirement from 10% to 15% of annual budgeted assessments, effective in mid-2026, with additional alignment to the reserve study’s recommended allocation.
• Insurance carriers evaluate reserve adequacy as part of D&O and property underwriting.
• The fiduciary duty of care under Texas BOC § 22.221 requires informed decision-making on capital obligations — which functionally requires reserve analysis even without an explicit statutory mandate.

Budget Season Timing

For Texas associations with calendar-year budgets, the budget cycle typically runs August through November. The reserve study should be in hand — or commissioned with delivery scheduled — before substantive budget deliberation begins. A budget adopted without current reserve analysis is essentially a guess, and a guess on the most consequential financial decision the board makes each year.

The Reserve Study Refresh Cycle

Industry standards under CAI’s National Reserve Study Standards typically call for:

• A comprehensive (with-site-visit) reserve study every 3–5 years.
• Update studies (without site visit, financial-projection refresh only) in intervening years.

Associations with reserve studies older than 5 years are operating on stale data. Capital project costs, inflation assumptions, useful-life adjustments, and component condition all change. The study that informed the 2021 budget should not be the basis for the 2027 budget without an update.

The Compliance Audit Checklist

Why Boards Defer These Obligations — and Why That Doesn’t Work

Boards almost never deliberately ignore compliance obligations. The gaps accumulate for understandable reasons:

• The obligations are spread across multiple agencies and advisors. No single person owns the full picture.
• The consequences are delayed. A stale registered agent doesn’t produce a problem until a lawsuit arrives. A missing TREC filing doesn’t produce a problem until collections start. A 12-year-old reserve study doesn’t produce a problem until a major project surfaces.
• The work is unglamorous. Pulling entity records and filing certificates does not produce visible community improvement. Adopting a new amenity does. Budget time is finite.
• Volunteer turnover. The director who knew about the franchise tax filing rotated off the board. The new directors don’t know what they don’t know.
• “The manager handles it.” Managers handle a lot — but the board is the responsible party. Delegation is fine; abdication is not.

The fix is not heroism — it is calendar discipline. An annual compliance audit, calendared and executed before each budget cycle, takes a few hours and produces the durable confidence that the association is operating on solid procedural ground.

Why This Matters: The Real Cost of Non-Compliance

Financial cost. $1,000-per-day TREC penalties. Lost attorney’s-fee recovery in collection cases. Franchise tax penalties and interest. Reconstructed tax returns. Emergency reserve study commissions at premium rates.

Operational cost. Corporate forfeiture that prevents the association from defending litigation, enforcing deed restrictions, or signing contracts. Stale governing documents that complicate every enforcement matter. Reserve gaps that produce special assessments at the worst possible time.

Personal director cost. Personal liability for corporate debts during forfeiture periods. D&O coverage friction. Fiduciary-duty exposure under TBOC § 22.221 if compliance gaps reflect a failure of ordinary care.

Reputational cost. Owners who learn the association has been out of compliance with basic state obligations lose trust quickly. Recovery takes years.

Market cost. Lender warrantability problems that affect resale. Insurance carrier scrutiny. Realtor conversations about the association that turn negative.

Frequently Asked Questions

Our association is small — do all these obligations really apply?

Yes. Most of these obligations apply regardless of association size. Corporate filings, TREC management certificate, federal tax filing, and franchise tax requirements apply to small communities just as to large ones. Reserve study expectations and governing-document modernization are similarly size-neutral. The administrative burden is smaller for smaller associations, but it is not zero.

What if we’ve never filed with TREC?

File immediately. If your association recorded a management certificate with the county clerk on or before December 1, 2021, the original TREC deadline was June 1, 2022. Associations that missed it should engage with the TREC management-certificate framework at hoa.texas.gov and consult counsel about exposure for the gap period.

How do we know if our governing documents are out of date?

Two quick tests: (1) Do the bylaws reference the Texas Non-Profit Corporation Act (Article 1396)? That statute was replaced by TBOC Chapter 22 effective January 1, 2010. (2) Have the documents been amended in the last 10 years? If the answer to either question is no, the documents are likely a candidate for modernization. Counsel review is the right next step.

Can we self-prepare the federal tax return?

Form 1120-H is simpler than Form 1120, and some small self-managed associations prepare it in-house. Best practice is to engage a CPA familiar with community-association taxation — particularly for the election decision (1120-H vs. 1120) and for ensuring the 60% income / 90% expenditure tests are met.

Are reserve studies actually required in Texas?

Not by state statute (unlike Florida’s SIRS framework). But governing documents often require them, lender warrantability standards increasingly require them, and fiduciary-duty principles functionally require them. The 2026 Fannie Mae and Freddie Mac reserve allocation change (15% floor effective mid-2026) raises the practical urgency further.

What if we discover we’ve been out of compliance for years?

Engage counsel and (for tax matters) a CPA. The standard remediation path is: (1) confirm the scope of the gap, (2) bring all current filings up to date, (3) address any retroactive consequences, (4) document the remediation in the board minutes, (5) build the compliance audit into the annual governance calendar to prevent recurrence. Most gaps are remediable; ignoring them while knowing about them compounds the problem.

Who should own compliance audits on the board?

Typically the secretary (for corporate filings and TREC), the treasurer (for tax and franchise tax matters), and the president (for governance-document and reserve-study oversight) share responsibility. The annual compliance audit should be a standing agenda item, ideally before each budget cycle.

What does an annual compliance audit actually cost?

For most associations, the audit itself is internal and costs no more than several hours of board and manager time. Counsel review of governing documents typically runs $1,500–$5,000 depending on document complexity. A reserve study update typically runs $1,500–$3,500; a comprehensive new study runs $3,000–$8,000 for typical residential communities. CPA engagement for federal/franchise tax filings typically runs $750–$2,500 annually. Each of these costs is materially less than the cost of remediating a missed obligation.

Key Takeaways

• Six Texas state compliance obligations every community association should audit annually: corporate filings, TREC management certificate, federal tax (1120-H/1120), franchise tax, governing-document currency, and reserve study.
• TREC management certificate filing under SB 1588 (2021) carries $1,000-per-day administrative penalties and forfeits attorney’s-fee recovery in collection matters when the certificate is not on file.
• Corporate forfeiture by the Texas Secretary of State or Comptroller can produce personal director liability for debts incurred during the forfeiture period.
• Federal Form 1120-H requires the association to meet the 60% income test and 90% expenditure test; failure to file produces compounding penalties.
• Governing documents older than 7–10 years are typically a candidate for counsel review and modernization to address legislative changes including SB 1588, HB 614, solar protections, and the 2010 TBOC transition.
• Texas does not statutorily require reserve studies, but documents, lender standards (especially the 2026 Fannie/Freddie 15% allocation change), insurance, and fiduciary duty all functionally require them.
• Compliance gaps accumulate quietly for years; the cost of remediation rises with time. Annual audit before budget season is the structural defense.
• The audit is a few hours of board and manager time. The remediation cost of a missed obligation can run thousands to tens of thousands of dollars.

References & Sources

1. Common Interest Community Standards Council, Fundamentals of Association Management — chapter on Texas Compliance Calendar and Corporate Housekeeping.
2. Texas Business Organizations Code Chapter 22 — Nonprofit Corporations.
3. Texas Business Organizations Code §§ 5.201–5.206 — Registered Agent and Registered Office.
4. Texas Property Code Chapter 209 — Texas Residential Property Owners Protection Act.
5. Texas Property Code § 209.004 — Management Certificate.
6. Texas Property Code Chapter 82 — Texas Uniform Condominium Act (TUCA).
7. Texas Property Code Chapter 81 — Pre-1994 Condominium framework.
8. Texas Senate Bill 1588 (87th Legislative Session, 2021) — Sections 9 and 10 (TREC management certificate framework).
9. Texas Real Estate Commission (TREC), HOA management-certificate database at hoa.texas.gov.
10. Internal Revenue Code § 528 and IRS Form 1120-H (U.S. Income Tax Return for Homeowners Associations).
11. IRS Instructions for Form 1120-H (most recent edition).
12. Texas Tax Code Chapter 171 — Franchise Tax.
13. Texas Comptroller of Public Accounts — Form AP-206 (Application for Exemption — Homeowners’ Associations).
14. Community Associations Institute (CAI), National Reserve Study Standards.
15. Fannie Mae and Freddie Mac project-eligibility guidelines — 2026 reserve funding allocation framework.

Related Resources & Additional Reading from the CIC-SC Library

• Texas Business Organizations Code Chapter 22 — What HOA & Condo Boards Must Know
• Texas Open Meetings Requirements Under § 209.0051 — Complete Board Guide
• Texas Candidate Solicitation Requirements Under § 209.00593
• HOA Records Retention Policy — Texas Under § 209.005
• Texas Annual Member Meeting Compliance: With Director Election
• Texas Annual Member Meeting Compliance: Without Director Election
• Texas Condominium Meetings Under Chapter 82 (TUCA)
• Texas Pre-1994 Condominium Meetings Under Chapter 81
• Operating Fund vs. Reserve Fund — The Critical Distinction
• Reserve Funding Methods — Fully Funded, Threshold, and Percent Funded
• Understanding ROI in HOA Operations — Spending Money the Smart Way
• The Business Judgment Rule in Texas — How It Protects HOA & Condo Boards
• The Volunteer Board Member: What the Role Actually Is

Tags: Texas compliance · TREC management certificate · SB 1588 · Form 1120-H · franchise tax · governing documents · reserve study · budget season · corporate forfeiture · § 209.004 · § 22.221 · hoa.texas.gov · 2026 Fannie Mae reserve allocation

Disclaimer. This article is published by the Common Interest Community Standards Council for educational and informational purposes only. It is not legal, tax, or financial advice and does not establish an attorney-client or tax-advisor relationship. Statutory references and procedural frameworks are intended to support informed governance, not to substitute for advice from qualified Texas legal counsel, a CPA familiar with community-association taxation, and (where applicable) a reserve specialist. Compliance deadlines, penalty amounts, and exemption criteria are subject to legislative and regulatory change. CIC-SC, its authors, and its members assume no liability for actions taken in reliance on this content.