Re: Reserve Studies
From: Sharon Villines (
Date: Sat, 31 Dec 2011 10:05:45 -0800 (PST)
On 30 Dec 2011, at 8:07 AM, David Clements and Evan Richardson wrote:

> 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.

Thank you so much for explaining so clearly the difference between 1120H and 
1120 filing. I have a long statement from our accountant that is a bit clearer 
than mud. Our accountant decides each year which form to use. If it is okay, I 
would like to forward this to the Reserve Studies email list. 

For those of you who are new, the Reserve Studies list was started after a 
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I doubt if the IRS would write down any specific lists of times for what can be 
considered Replacements. Specialists are people who learn this over time. They 
have to understand how IRS agents think.

At Takoma Village we do both a Replacement and a Maintenance Reserve and keep 
the accounting separate, but our more conservative members frequently object to 
what the Replacement Reserves can be used for, so it isn't just the IRS. Our 
specialist will include onetime allowances for major repairs that include 
upgrading the asset and occur well before the expected useful life is reached. 
If the specialist has not included the allowance, I'm in for an argument. I 
keep lists of things to discuss with him when the next study is done so they 
get included.

But Association Reserves (some where on their website) explains that the 
purpose of the Capital (repair and replacement) Reserve is to preserve the 
capital investment of the owners. In order to do that facilities must be 
upgraded to market standards as they are repaired or replaced. Otherwise the 
capital investment is not maintained at the current market rate. Also in many 
instances the original quality is no longer available since a better option has 
been developed. 

According to Association Reserves and our specialist, neither of these 
situations makes the upgrade a Capital Improvement.

> 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.  

Over time, as the balance in the reserve fund grows and the amount of the extra 
interest also grows, would the risk be greater or less? I'm thinking that it 
would be less because there is some flexibility in when repairs are done and a 
larger fund would result when major repairs are upcoming. If a major expense is 
put off for one year, the interest rate gain might offset the loss of capital.

We just deferred for at least one year a projected need to paint our exterior 
at a cost of $45,000. When the painting contractor was on site to look at 
another project, he said unasked that it was not necessary and that we might be 
able to go even another year. At 3% investment interest we would be close to 
$3,000 ahead as long as the wait doesn't result in more expensive repairs from 
water damage.

Sharon Villines
Takoma Village Cohousing, Washington DC

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