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.
One of the primary business duties of community associations is maintaining and preserving property values of homes and the common property. To do this properly, associations must develop funding plans for future repair or replacement of major common area components, such as roofs, boilers, elevators, swimming pools, balconies, asphalt surfaces and decks.
An association has several funding options, including periodic assessments over the life of assets, special assessments at the time of replacement, borrowing funds when needed, a combination of the above or the most common method – and in many states the only lawful alternative: setting aside funds in a special category commonly called reserve funds.
You’ve heard it before: As an HOA board member, you have a fiduciary duty to the owners. And though it’s hard to sometimes make the tough decisions, be impartial, or be the bad guy or gal, it’s part of your job description.
As budget season approaches, many associations are focusing on their reserve stud-ies for two reasons only; one, it is required, either by state statutes or governing documents, and two, to make sure that the reserve assessment fits within the de-sired overall budget of the association.