Re: HOA income, taxation, and insurance "cans of worms" (was flip taxes)
From: David L. Mandel (dlmandelpacbell.net)
Date: Mon, 12 Feb 2007 23:52:55 -0800 (PST)
See Internal Revenue Code Sec. 528:
http://caselaw.lp.findlaw.com/scripts/ts_search.pl?title=26&sec=528
As long as 60%+ of an HOA's revenue is "exempt function income" it maintains tax-exempt status for that income. Other income, not related to the HOA's function as managing and maintaining the property on behalf of owners, is taxable at a 30% rate. This would include rental of the facilities to outsiders, for instance. Also return in invested assets, like your reserve fund -- which is a good reason to consider investing them in relatively tax-free bonds or bond funds. Liability for damage is a whole separate issue best discussed with a good insurance person, as laws vary from state to state.
David Mandel
Southside Park Coho, Sacramento

----- Original Message ----- From: "Deborah Mensch" <deborahmensch [at] gmail.com>
To: "Cohousing-L" <cohousing-l [at] cohousing.org>
Sent: Monday, February 12, 2007 9:45 AM
Subject: [C-L]_ HOA income, taxation,and insurance "cans of worms" (was flip taxes)


On 2/12/07, Michael Barrett <mbarrett [at] toast.net> wrote: (in the context of
the thread on flip taxes)


Does not any payment made to the HOA count as income, and thus be
potentially liable for taxation?


Please pardon me if this question is naive, but doesn't an HOA receive
income every month in the form of homeowners' fees, and sometimes other
income such as buyout fees for work systems, etc.? Is there something
special about other forms of income that make them more problematic to deal with? I guess this has come up about payments for classes held in the common
house, donations for guest rooms, and other situations, too.

I am in a new forming community, and the question whether HOAs should shy
away from events with tax consequences (such as having an employee or extra
sources of income) or liability consequences (such as having residents do
physical labor, or neighbor kids play, on the premises) keeps popping up in cohousing conversations. I'm assuming we will be paying taxes, and probably carrying workers' comp and liability insurance as part of our HOA insurance
anyway, so where do the problems come in?

I can certainly sympathize with the plight of volunteer bookkeepers if an
action opens a whole new can of worms on accounting or taxes, or with those
who keep up with insurance if an action makes the HOA more expensive to
insure or harder to buy insurance for; but I don't know whether these are
the case. Can anyone enlighten me as to where "ordinary" ends and "new can
of worms" begins? Does it depend on the HOA's legal status?

Thanks much,
Deborah Mensch
Member, Tumblerock forming community, central Colorado
Currently at Pleasant Hill Cohousing, Pleasant Hill, CA
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