(a) A homeowners’ association organized and operated to provide for the acquisition, construction, management, maintenance, and care of residential association property if all of the following apply:

1. (1) Sixty percent or more of the gross income of the organization for the taxable year consists solely of amounts received as membership dues, fees, and assessments from either of the following:

   1. (A) Tenant-stockholders or owners of residential units, residences, or lots.
   2. (B) Owners of time-share rights to use, or time-share ownership interests in, association property in the case of a time-share association.
2. (2) Ninety percent or more of the expenditures of the organization for the taxable year are expenditures for the acquisition, construction, management, maintenance, and care of association property and, in the case of a time-share association, for activities provided to or on behalf of members of the association.
3. (3) No part of the net earnings inures (other than by providing management, maintenance, and care of association property or by a rebate of excess membership dues, fees, or assessments) to the benefit of any private shareholder or individual.
4. (4) Amounts received as membership dues, fees, and assessments not expended for association purposes during the taxable year are transferred to and held in trust to provide for the management, maintenance, and care of association property and common areas.

(b) The term “association property” means:

1. (1) Property held by the organization.
2. (2) Property held in common by the members of the organization.

3. (3) Property within the organization privately held by the members of the organization.

   In the case of a time-share association, “association property” includes property in which the time-share association, or members of the association, have rights arising out of recorded easements, covenants, or other recorded instruments to use property related to the time-share project.

(c) A homeowners’ association shall be subject to tax under this part with respect to its “homeowners’ association taxable income,” and that income shall be subject to tax as provided by Chapter 3 (commencing with Section 23501).

1. (1) For purposes of this section, the term “homeowners’ association taxable income” of any organization for any taxable year means an amount equal to the excess over one hundred dollars ($100) (if any) of—

   1. (A) The gross income for the taxable year (excluding any exempt function income), over
   2. (B) The deductions allowed by this part which are directly connected with the production of the gross income (excluding exempt function income).
2. (2) For purposes of this section, the term “exempt function income” means any amount received as membership fees, dues, and assessments from tenant-shareholders or owners of residential units, residences, or lots, or owners of time-share rights to use, or time-share ownership interests in, association property in the case of a time-share association.