The Internal Revenue Service (“IRS”) excludes from an association’s taxable income those amounts which are properly kept and used for capital contributions. In several significant Revenue Rulings, the IRS considered special assessments for major repairs and replacements to be capital contributions in addition to capital contributions to reserve funds from annual assessments.
“I have a board member right now who wants to get his board to roll back assessments by 50 percent and not fund reserves,” says David C. Swedelson, principal at Swedelson & Gottlieb, a law firm that represents associations in the Los Angeles area. “He’s in [financial] trouble. So he’s getting a petition of homeowners to compel the board to vote to reduce assessments.”
In this ever-scary economy, Swedelson is surely not the only attorney to field questions from boards about whether they can stop or reduce their funding for reserves as a way to ease the burden on homeowners. Some, but not all states, have laws governing associations’ reserve practices, so investigate your state law before your board takes any action.
Here, attorneys offer a taste of how state laws work from their perspective at each end of the country—California and Florida.
News items of national interest regarding Condominium and Homeowner associations, compiled by the Community Associations Network
While the question seems simple, the reasons and motivations vary slightly depending on whether you are a manager, a Board Member, or a community resident. So in order to discuss these motivations, let’s first look at the basic reason why Reserves exist in the first place.
Protect and Enhance – The basic, bottom line, cut-to-the-chase principal here is this: Adequately funding the Reserves protects and enhances the physical assets in the community. It also protects and enhances the investment that each owner has made in buying property in the community. It does this by making sure that funds are available to replace worn out components on a timely basis while avoiding the need for special assessments.