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Can HOA board shift operating funds to reserves at end of year?

Posted on Mon, Dec 05, 2011 @ 06:32 AM

Can the HOA Board decide to take excess operating funds and move it to reserves at the end of the year? Our HOA fees are $1200 per month. $1000 per month is for operating costs and $200 a month goes into reserves. However this year we had excess of $160,000 in operating funds. So the board decided to roll it over to reserves. We are not sure in our reserves. Can the board make this decision on its own or should they let the homeowners vote on it? We only have 130 units so they collected $1230 from each homeowner in excess. (Please note these numbers have been rounded out.)

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It's a hard issue to respond to since you have not mentioned your location. Regulations are state issues and much depends on how your Association is set up. If there are other owners that are concerned, get together and contact an experienced Real Estate Attorney and let him take a look at your docs. I presume it will cost less than $500 for a professional response. If several people are concerned, each owner, combined, will spend little to find out the truth. 
Don't ask someone's uncle or sister. Get a professional opinion and PAY FOR IT. If it's not worth paying for, forget about it and move on with important issues in your life.

posted @ Monday, December 05, 2011 7:39 AM by Lawrence Weiss

You're worried about nothing.  
Extra funds belong in the reserve fund. One day, you'll need it. Not maybe, but definitely need it. 
Our board likes to take it up a few notches. They shuffle money back and forth between operating and reserves on an almost weekly basis. 
They think they can fool us or a bank into thinking that we have more money in reserves that we actually do. 
At the end of the year they'll show us a pile of money in reserves only to shift it back into operating.

posted @ Monday, December 05, 2011 8:19 AM by Mike

Mike what planet do you live on? Shifting funds back and forth from the reserve is never a good thing. Most members should agree and the reasoning must be sound. If there is money left at the end of the year it should go to the Reserve however, you fail to mention how much money. I have a situation where my board refuses to make and adopt a budget year after year. Two years ago the board collected over $33,000 too much and we have only 22 units…now this is a problem because the dues are too high and it effects selling. Take a look at your budget and see where the Board “over planned” and make certain that the following year’s budget is adopted and reasonable. PS I have another condo in FL where we NEVER carry a reserve….The idea. Better in my pocket than yours…We simply have assessments when additional monies are needed…..I think this is a better way to manage!

posted @ Monday, December 05, 2011 8:56 AM by Ruth O'Louhghlin

There is no reason why excess operating funds cannot be deposited into the reserve fund at year-end. However, you should check your gov. docs. it may be a requirement to give the $$$ back to the members. If the monies are returned to the members this can only be done if the assn files the corp. tax return 1120. The monies returned are not taxable income since it was returned to the members. 
It appears to me that your assessments are much too high if that much was in excess. Generally I never recommend lower the assessment; however, in this case I believe it may be a good idea -- $1,230 excess for each member is quite high. Also it may be a good idea to increase the amount put in the reserve fund each month. The board should take a good hard look at the budget to find out why there is such a large excess. Did they present a balanced budget for the year? What expense(s) wasn't paid or grossly over-budgeted?

posted @ Monday, December 05, 2011 9:17 AM by mary

Shuffling money between the operating and reserves funds is normal but only for the following reasons: 
1) depositing money monthly into the reserve fund as per your budget 
2) if reserve projects are being undertaken, funds are deposited into the operating account from the reserve account to pay for the expenditure 
3) on occasion, the board may be required to use reserve funds to pay for an unexpected expenditure but this money must be put back into the reserve account as soon as possible

posted @ Monday, December 05, 2011 9:23 AM by mary

The recommended method of budgeting is to have 2 identified categories of assessments - one for Operating and one for Reserve - added together equaling the total assessment collected from each party. The budget then shows an expense line item for "operating reserve" as recommended by many CPAs active in the association business. A subsection of the budget is the "expense" for Reserve contribution. 
Unfortunately many associations in the past have just waited until the end of the year to transfer any excess income into Reserves; thereby not appropriately funding the Reserves required for long-term maintenance. This has allowed associations to handle the cash flow issue rising put of delinquent owners.  
Reminder to owners agreeing with the thinking of many in areas such as Florida - current standards for mortgage companies do not support the "pay as you go" attitude of those not funding reserves on an ongoing scheduled plan.  
As to the facts presented - it appears that this condo has an excessive cash flow and a possibly flawed budget for the current year. The IRS has considered excess income as taxable unless the owners (not the board) vote to carry over to the next year and thereby reduce the needed assessment contribution for 2012. This vote must be taken in a meeting of members - often recommended as an action item at the Annual or Budget Meeting of members.  
A board has a fiduciary responsibility to its members to plan budgets based on legitimate projected expenses and income.

posted @ Monday, December 05, 2011 9:26 AM by Nancy Jacobsen

Both of your condo assn's are not operating in an efficient manner. 
Not preparing a budget then having $33,000 in excess funds at year-end is unconsionable. This board should be replaced! There is no excuse for this incompetence. 
Calling for special assessments instead of having a reserve fund is very poor management. By raising the assessments and depositing money into a reserve account each month, funds will be available when projects are required to be undertaken. Also, it's less of a burden on the individual member because they do not have to come up with hundreds or perhaps thousands of extra money to pay for the special asessment. This is very poor management! 


posted @ Monday, December 05, 2011 9:31 AM by mary

In my HOA, I raised the monthly assessment about 20% as soon as I took over management of the HOA. The developer went bankrupt and left us nothing. He even made off with the extra assessments the other unit owners paid at closing.  
I have been putting 25% away in a separate reserve account ever since. We had a special assessment of about $5,000 per unit a few months ago to fund a project to seal the outer walls of the buildings as they were leaking and causing water damage to each unit.  
This sealing must be done every 5-7 years due to the nature of the brick the developer used on the outer walls (which has since become illegal in Chicago).  
My plan is to have enough in the reserve fund in the next five years so as NOT to have another special assessment. The other unit owners have agreed. They have also agreed with my request to transfer any excess (we're talking maybe a few hundred dollars) to reserves at year end.  
I agree with Mary, special assessments are not the best way to go these days. The other unit owners found us a burden but we were able to get the funds together to proceed with the building repairs. In each case they told me that it would be easier to have a slightly higher monthly assessment, rather than one very large special assessment.  
Also, I should mention that one of the units is under contract to sell and the lender had lots of questions about the special assessment and the reserve fund. It looks as if I did something right though, as the lender is satisfied and the sale is going through.  
A note of caution to anyone selling, banks are taking a very close look at reserves for condo buildings. 

posted @ Monday, December 05, 2011 10:02 AM by Donna

First, we are all assuming that the transfer into reserves was excess operating money. 
Let us assume, for the sake of argument, that it is excess operating funds. This is the ideal thing to do with excess operating funds. It allows the community to properly plan, meet obligations and at the same time, not increase fees. 
The only way to know for sure is to have a reserve plan or reserve study, either one you do yourself or one that you hire someone to do.  
The second portion of this is operations. Some will look and say that the budget is too much, the board is not properly planning. The best thing is to look over multiple years. This may be a light year for many, many reasons. Maintenance was not needed. It was well done, but maybe next year there will be needed maintenance. 
Some excellent points were made in reference to boards, budgets and excess amounts. Without a budget, which is only a plan for expenses, you have no idea where you are going. 
Of course, we have a Congress that hasn't passed a budget in almost three years and no one seems to care about that, so don't get yourself too worked up if your board has not passed a budget. It is better to encourage them to do the right thing and pass a budget. 

posted @ Monday, December 05, 2011 1:05 PM by Joe Schuirmann

Assessing owners for capital expenditures rather than budgeting for them by placing funds into your reserve account is a horrible way to manage your Association and some states condo laws have specific laws governing the subject. Ohio now requires all Associations provide for “reserve” funds in the association’s budget to avoid special assessments, and to 2) obtain a majority vote annually of the ownership to waive the reserves. 
Ohio has also changed the “Residential Real Property Disclosure Form” to include a specific question that sellers must now answer about special assessments for condos. 
It places an unfair hardship on owners to be assessed 
because the Board does not know how to do a proper budget and plan ahead.  
You also need to consider FHA certification and their requirement to maintain 10% of your annual budget in reserves. We have also had to provide the current years fiscal budget to the title and mortgage company for buyers seeking loan approval. They will want to see what you have in reserves and to confirm you actually have a budget. Recently we had to provide 2 years worth of budgets. I have lived in my unit since 1994 and we have not charged the owners any assessments. We totally repaved our property which was over $100K and we are planning to put new roofs on and the funds are coming from reserves which are set aside monthly.  
Why are your fees so high? What is covered in the fees and how old is your property? Is your Board planning capital improvements? What do your governing docs say about reserves? We vote on Revenue Ruling 70-604 each year at our annual meeting. 

posted @ Monday, December 05, 2011 6:44 PM by Kathy

Back to the original post. The excess funds were from operating expenses. Our reserves are presently funded at 80%. Minimum funding in the state of Hawaii is 50%. We have a very healthy reserves, with over $1,000,000. They over collected because they budgeted to high for our insurance 
Since they collected it for and it was not spent, I feel it should go back to the owners. The economy is tight and those funds are equivalent to 1 months dues. Unfortunately our board members are very wealthy, yet some of us are just making ends meet.( They referred to the excess as funny money) Hence why my home is on the market

posted @ Thursday, December 08, 2011 1:47 PM by Kathi

Be aware that returning the excess funds to the members is only an option if the assn. files the corp. tax form 1120. Also, it's a requirement that the members vote on this. If your assn. files the HOA tax form 1120H, returning the excess fund is NOT an option.

posted @ Thursday, December 08, 2011 3:29 PM by mary

My condo board has hired a lawyer to foreclose on our unit due to non payment of monthly fees. I contested the total due as I have been denied access to books and records for over 2 years. 
The condo board and owners voted to set up a special assessment to pay legal bills from a settlement. They have been collecting $250 per unit (20) units for almost 2 years past the final payment was made.  
The excess in the fund almost $120k is now being transferred to an existing reserve fund which is being used for operating expenses as well. 
A vote or proposal on using the funds for another purpose was never held at a public meeting . 
There is no record of the vote discussion or a vote ( which is why they are denying us access to books and records. 
I live in NY and need help as the clock is ticking.

posted @ Tuesday, January 10, 2012 9:43 AM by Mr M

You need help with what? 
Have you checked your gov docs and state law to see if a vote of the members is required to use reserve funds for operating expenses? Unless your state has laws governing reserve funds I doubt that this is required. Most assn gov docs do not address this. 
With regard to your pending foreclosure. Are you claiming that you are not delinquent? You should know exactly what you paid and when and whether you are delinquent w/o seeing the assn's records. Do the gov docs and/or state law say you have a right to these records? NY is a judicial foreclosure state which means you will have your day in court to prove you are not delinquent. Remember, late fees and attorney costs have also been added to your account. You could have saved yourself this grief if you had paid every month on time. 
As for the special assessment, you should have voted on an amount that would be collected from each member. Once the monthly payments reached this amount the collections should have stopped. If the members continued to pay then they are all stupid. I can't believe you all continued to pay and now in excess of $120k has been collected. Sorry, but that is a lot of stupidity!!! The board can only be errant with the help of the members.

posted @ Tuesday, January 10, 2012 10:13 AM by mary

I would be very, very cautious about taking excess operating funds and transferring them into a reserve fund. The most important question here involves the purpose of the reserve fund. If the reserve fund is to be used for emergency repairs or other contingencies, then this may be OK but may not be a good idea. Excess funds collected for operating expenses may be taxable income to the condo association, and I am quite certain that they should never be used for a capital/replacement reserve because there is different tax treatment for capital vs. operating expenses. 
This is a very important distinction in a condo association where an owner rents out a unit to a tenant (or where the association owns a unit and rents it out). In those cases, an assessment paid by an owner for operating expenses is tax deductible, but an assessment paid into a capital/replacement reserve fund is not deductible as a current expense but can be applied later as an adjustment to the cost basis of that unit for capital gains tax purposes when it is sold. 
If you take extra operating income and transfer it into a capital/replacement reserve fund, then it may be considered retained earnings for the corporation and you may have a tax liability at the end of the year. 
I would strongly recommend doing some research into IRS Revenue Ruling 70-604. 

posted @ Saturday, January 14, 2012 8:08 PM by Steve

If an HOA files the federal tax form 1120H (only for HOAs) only nonexempt income is taxable which does NOT include assessment income. 
Excess funds may be deposited into the reserve account -- it is NOT taxable income. 
IRS revenue ruling 70-604 only applies to an HOA that files the federal tax form 1120 (for corps). The ruling states that excess assessments returned to the members or applied to the following year's assessments are not taxable income. The ruling also states that the members must vote on whether to return the excess to the members or apply to the new year.

posted @ Sunday, January 15, 2012 2:11 PM by mary

Thanks for the clarification, Mary. My particular concern about this issue (which may not reflect the original question) involves a condo association where an owner uses one or more units as a rental property. If that owner deducts the assessment as a current expense, then it has to show up somewhere as "current income" one way or another. If the association takes the excess income and puts it into a reserve fund to be used for capital expenditures, then the legitimacy of the original tax deduction for this owner is called into question. 
I realize this is a specific case that may not apply very often in residential condominiums, but in my opinion it points to the underlying reason why the money used for operating and capital expenses should be segregated as much as possible. If an association wants to take excess operating revenue from the owners and put it into a capital reserve fund, then I would recommend that the association should pay the owners back according to what they've paid into the operating fund, then do a separate assessment -- for the same amount -- as a reserve contribution. 
The importance distinction here comes from the nature of the payment from the owner's perspective. An assessment to cover operating costs is an expense, while an assessment to cover the replacement of capital assets is an investment and therefore can't be documented as a current deduction.

posted @ Sunday, January 15, 2012 6:05 PM by Steve

It's apparant you've never taken an accounting course! <G> Whether the expenditure is for the replacement of a capital asset or for an operating expense, on the P&L statement it's an expense. The assn has no control over whether an owner shows his assessment payment as an expense on his tax return. All the assessments paid to the HOA are shown as income and that income is not taxed if the HOA files the HOA specific tax form 1120H. 
Monies held in reserve should always be put into a separate bank account. The operating budget should show the amount to be deposited into a reserve account and that transfer should be undertaken each month. The treasurer or mgmt co should prepare a separate financial statement for the reserve account(s) so the board knows exactly how much is in reserve and what expenditures are being made. Our mgmt. co. actually prepares financial statements each month, one for the reserve account, one for the operating account and the third is a consolidated statement which combines the two.

posted @ Sunday, January 15, 2012 6:58 PM by mary

Let's step back for a moment and think of this in an abstract manner. We'll use a simple example of an asset (a building) that has both operating and capital expenditures for its maintenance and upkeep. If the building is owned by a single owner as an apartment building, are the capital expenditures (resurfacing a parking lot, for example) deductible as current expenses at the end of the tax year? Absolutely not. These expenses have to be depreciated over the life of the asset, not written off as a current expense in the year they were paid. 
Under Federal tax law, the same principle applies to a condominium association. A condominium association that files Form 1120 is not a homeowners' association, but a regular corporation. If a condominium association collects $100,000 in assessments for operating expenses in a year, incurs $80,000 in operating expenses that year, and files a Form 1120, then it has effectively generated $20,000 in taxable income unless it returns this money to the owners in one form or another (either by paying them back directly or crediting the excess $20,000 against the following year's assessments via an election under Revenue Ruling 70-604. 
Capital expenditures have no bearing on this, and must be accounted for completely separately without any commingling. In the simple example I used, above with a regular building and a condominium building, one important distinction is that the condominium association cannot depreciate capital expenses like a regular building owner can -- because the association has no ownership interest of its own and no title to any property. The owners collectively own the common elements, so the capital contributions paid for the replacement of these elements must be collected and reported separately. 

posted @ Tuesday, January 17, 2012 9:43 PM by Steve

All I can say is that, IMO, you are wrong. The HOA does not have to account for assessments deposited into the reserve account separate from assessments placed in the operating account. I know of no IRS ruling which states this.  

posted @ Wednesday, January 18, 2012 5:05 PM by mary

Aside from any specific IRS rulings, the risk in a situation like this is that the IRS will audit the association and determine that the capital and operating funds have not been adequately segregated. This means that an association filing Form 1120 could very well be forced to pay income taxes on funds it allegedly collected for capital reserves. 
Anyone reading this is free to do as they wish, but be advised about the dangers here.

posted @ Thursday, January 26, 2012 11:13 AM by Steve

Aside from any specific IRS rulings, the risk in a situation like this is that the IRS will audit the association and determine that the capital and operating funds have not been adequately segregated. This means that an association filing Form 1120 could very well be forced to pay income taxes on funds it allegedly collected for capital reserves. 
Anyone reading this is free to do as they wish, but be advised about the dangers here.

posted @ Thursday, January 26, 2012 11:13 AM by Steve

Question - can you transfer funds in named operating accounts ex. pest control into another accounts excluding reserve accounts

posted @ Friday, August 24, 2012 8:26 PM by anthony

Last January I posted my concerns regarding the condo associations special legal assessment collections continuing past the bills were paid. 
I had been denied access to see the condos books and records for over 4 years. Which made me more suspicious. The boards treasurer is A CPA and the main driver of the secrecy. 
Well I saw the records on Tuesday and am not sure what to do with the info. 
Specifically : 
1.The assessment funds were only were transferred to the special account at the end of the year. 
4. While the legal bills were paid out of the operating fund monthly. 
Basically, It was impossible to see what was collected and paid out as the special funds were commingled with the operating funds. 
My belief is that there was about 70K in funds that were over billed which translates into each of the 20 unit owners over contributed $3500 each 
Now it gets confusing because the membership was only asked to approve the legal assessment=  
at some undetermined point the legal funds purposes were expanded to include 2 new ones.  
An "other purposes" and marina rebuild reserve. 
were added to the purposes of the legal fund- without owner consent. (the legal fund had owners approval- ( by-laws do not require membership approval for special assessments) 
Now when I .look at the records all I see is a single 1x transfer from operating to the single assesment account which had maybe as muh as 3 but now 2 purposes "other' and marine. 
By the way the condo board had not drafted any plans for the use of the assessment funds-nor is their a master or upkeep plan. 
At some point they added another 'use' of the fund for marina repairs and 'other purposes'. Further blurring the lines. 
The legal assessment fund had membership consent - these other funds which are also co-mingled with the general operating account did not. 
It is my understanding that co-mingling is not only outside best practices but a violation of the state condo law. I think it also creates tax consequences ? 
I would have thought that the CPA/ auditor should have caught this and mentioned it in his report or management letter. 
My goal is to force the overpayments returned to the members and I am trying to understand my points of leverage and options. 
Thank you

posted @ Wednesday, October 17, 2012 7:25 PM by Mr. M

I know that Hawaii home owners associations have to furnish names and addresses owners to other owners for things like soliciting for votes etc. but they HAVE TO furnish the HOA's EMAIL ADDRESS list? 

posted @ Wednesday, December 12, 2012 9:04 PM by Ron Alan

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