Cohousing-L Mailing List: reserve investment and taxes

[Diana Carroll (dianaecarroll]

(Branching topic off from the solar tax credits discussion so as not to
derail).

Phillip commented that Pacifica can't take advantage of tax credits because
they already pay zero in taxes. I asked:

> Do they not invest their reserves? We file form 1120-H and other than
> > a small $100 exclusion we pay 30% tax on investment income (interest in
> our
> > case).
>

Sharon responded

> Newer communities don’t have large reserves, and in many recent years
> there were little to no earnings on savings anyway.
>

Well, sure, but presumably all have *some *reserves getting *some *interest.
Even just $50k in reserves getting just 2% interest would yield over $1k in
interest, resulting in $250 in taxable income, so I'm still confused how
any community has zero taxable interest income other than maybe in their
first or second year.


> When Takoma Village asked the accountant this just after move-in, they
> said you have a long way to go before those earnings are large enough to be
> worth worrying about.


I don't "worry" about it, but I (as the bookkeeper for Mosaic Commons) do
pay taxes on it. you have to file and pay taxes, whether you owe $1 or
$100000. NOT paying taxes is something I'd "worry" about. I certainly hope
Takoma is paying their taxes!

Mosaic Commons has been paying taxes every year since control of the
condominium was turned over to the association from the developer in 2009.
For our early years our yearly tax bill was pretty low (<$1000) because of
the combination of low interest rates and a young reserve fund but it was
never ZERO. Now that we have built up a substantial reserve (about $500k
for our 34 unit condominium), I invest that money in mostly CDs, and we
earn $20-30k a year resulting in a tax bill of a few thousand a year.

The best way to take advantage of earnings on reserves is probably to spend
> the reserves on the facilities they were saved for.


Sure, that's how reserve funds work. We add our reserve fund earnings to
our reserve funds, and spend our reserve funds on the things all condos
spend them on -- capital maintenance and improvement like paving, painting
and roofs -- but doing so doesn't reduce taxes on those earnings (unless
you are filing 1120 rather than 1120-h, which would not be suitable for
most (any?) small condominium association.

One of the other factors that influences the Reserves Policy in each
> community is the economics of the community members. Some wealthy residents
> prefer to maintain low reserves because they can invest at higher rates as
> wealthy individuals.


I guess, in theory, but...not really. Fannie Mae used to require 10% of the
operating budget be put into reserves, and starting in 2027 is increasing
that to 15%. If your condominium association doesn't meet Fannie Mae
requirements it makes it nearly impossible for buyers to get a mortgage.
I'm skeptical that there are cohousing communities whose members are so
rich that they insist that all new buyers buy in cash. Is that a thing?!

Most cohousing communities are more concerned about economic diversity and
> maintaining affordability so they depend on robust savings with no
> surprises.
>

Right. And those robust savings result in taxable earnings. So I'm still
confused at Phillip's comment that Pacifica earns less than $100 (the
specific deduction threshold on the 1120-H) in interest/investment earnings
per year.

Diana