Re: Reserve Studies
From: David Clements and Evan Richardson (evdavwesaol.com)
Date: Fri, 30 Dec 2011 05:07:36 -0800 (PST)



I appreciate the communications about reserves.  

Several notes:

There are several comments about the IRS rules for what should be included in 
reserves:  "Our specialist says that painting specifically cannot be included. 
The IRS goes nuts over it. They call it maintenance."   "And more generally why 
does it [IRS rules related to reserves] matter?  HOA income is generally tax 
exempt."

Both these statements, which appear to be contradictory, are, I think, true in 
part.  I am not an accountant, but have educated myself on this.  Please 
confirm with your professional.  

These issues are related to how homeowners associations are taxed.  Most HOA's 
file using form 1120-H ( 
http://www.irs.gov/instructions/i1120h/ch01.html ).  For them, the income that 
comes from collecting assessments and dues is totally tax exempt, but other 
income, from investments, for example, is taxed at 30%.  There is no problem 
using assessments for either future repair and replacement or future 
maintenance (such as painting) because the income is not taxed in any event.

There is an alternative, filing using form 1120, which is used for standard 
corporations.  HOA's that file using 1120 are taxed (at 15%) on any excess of 
income over expenses.  For example, if income is $50,000 and actual expenses 
are $30,000 and reserve contributions are $20,000, then the HOA would be taxed 
on the excess, $20,000.  EXCEPT, that the amount in reserves that is related to 
repair and replacement is "sheltered," meaning deducted from the taxable 
income.  Money set aside for "maintenance," such as painting, cannot be 
deducted.  You can deduct the costs of maintenance only in the year of the 
actual expense.  Filing using 1120 but then deducting reserves intended for 
painting would indeed drive the IRS "nuts."

Most of us are probably using 1120-H, which is simpler in that "HOA income is 
generally tax exempt."  In that case, there is no problem with including 
painting in the reserves.  Our consultant from Reserve Advisors and our 
accountant agree with this.  I have read advice suggesting that if an HOA 
elects to file with 1120 and has included painting and other maintenance in the 
reserves, it is a simple matter for an accountant to calculate what part of the 
reserve contribution is for maintenance and thus cannot be sheltered/deducted 
from taxable income.

I don't have any good reference for what is the dividing line between 
tax-deductible repair/replacement reserve items and non-deductible 
"maintenance" items.  But for us and I suspect most on this list, it does not 
matter.  

RE investments:  We have continued to have a good experience using a 
limited-term municipal bond mutual fund, which is earning typically 3-4%, much 
more than CD's would.  Limited term bond funds have limited risk of volatility, 
but there is some risk of loss of principal, which has never happened to us.  
There are some in our community who would favor using CD's only and forgoing 
the extra $3,000 to $5,000 per year income that we have had using the municipal 
bonds.  

David
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Message: 3
Date: Fri, 30 Dec 2011 00:20:03 -0500
From: Sharon Villines <sharon [at] sharonvillines.com>
Subject: Re: [C-L]_ Reserve Studies
To: Cohousing-L <cohousing-l [at] cohousing.org>
Message-ID: <1025875E-0787-4B26-BE3B-EC046B4CC002 [at] sharonvillines.com>
Content-Type: text/plain; charset=windows-1252


On 29 Dec 2011, at 12:03 PM, Douglas G. Larson wrote:

An excellent post on reserves. Just some additions.

> Reserves are funds set aside by a Homeowner's Association to be prepared for
> the eventual replacement of assets. Those assets are very broad and can be
> big ticket items like roofs, driveways or painting (both interior and
> exterior) but can also be smaller items like fences, landscaping, decks,
> common house dishwashers, ovens or refrigerators.

Our specialist says that painting specifically cannot be included. The IRS goes 
nuts over it. They call it maintenance.

So we have a maintenance reserve as well. Anything that is done every year is 
in 
the operating budget ? every two years or more, in the maintenance reserve. I 
have a spreadsheet of these items, constructed from the Reserve Study.




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Message: 5
Date: Fri, 30 Dec 2011 06:04:15 -0500
From: Diana Carroll <dianaecarroll [at] gmail.com>
Subject: Re: [C-L]_ Reserve Studies
To: Cohousing-L <cohousing-l [at] cohousing.org>
Message-ID:
        <CAAJBS=-LzVaPGci6jgyQdXyKtBk38k=xemD80sNqg6EiHxMTjg [at] 
mail.gmail.com>
Content-Type: text/plain; charset=ISO-8859-1

Where can I find the IRS rules on reserve uses?

And more generally why does it matter?  HOA income is generally tax exempt.

I'm also curious what people are doing with their reserve funds,,,keep them
in a savings account?  CDs?  Invest in mutual funds?



 

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