PAINTING

Started by MichaelY • 9 replies • 1912 views

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MichaelY (Massachusetts)
Posts: 4

Posted:

iS PAINTING NORMALY A PART OF THE OPERATING BUDGET OR IS IT IN THE RESEVE SECTION OF THE BUDGET?

OUR MC SAYS WE ARE THE ONLY ASSOC. THAT HAS IT PART OF THE OPERATING BUDGET.

WE ARE IN MASSACHUSETTS.

LOOK FORWARD TO REPLIES.

DavidW5 (North Carolina)
Posts: 565

Posted:

You need to find a better management co. The IRS rulings do not allow use of reserves for painting. Doing so can jeopardize the nontaxable status of all reserve funds.

DonnaS (Tennessee)
Posts: 5,671

Posted:

Michael,

It is part of our operating budget. We have 230 homes and every 5 years, 46 of them get painted, rotating so every home is painted every 5 years. They are stucco outside. The Budget does not take such a large hit with doing them this way.

CarolF (Florida)
Posts: 435

Posted:

David - could you site where you found that IRS ruling. I'm not in a condominium, however I'm somewhat familiar with FL 718 for condos and it states the following:
2. In addition to annual operating expenses, the budget shall include reserve accounts for capital expenditures and deferred maintenance. These accounts shall include, but are not limited to, roof replacement, building painting, and pavement resurfacing, regardless of the amount of deferred maintenance expense or replacement cost, and for any other item for which the deferred maintenance expense or replacement cost exceeds $10,000. The amount to be reserved shall be computed by means of a formula which is based upon estimated remaining useful life and estimated replacement cost or deferred maintenance expense of each reserve item. The association may adjust replacement reserve assessments annually to take into account any changes in estimates or extension of the useful life of a reserve item caused by deferred maintenance.

I'm in an HOA in FL, which is governed by FL statute 720, and it does not contain the above wording.

LawrenceC1 (Georgia)
Posts: 480

Posted:

It is a capital expenditure that can be funded from the reserve. The usual definition of a capital expense is funds expended for improvements or major repairs or replacements of common property components that extend their useful lives or service periods. Often the definition of a capital expenditure includes a minimum time period that the repair is expected to last, such a 3 years.

In our Association we treat painting as a capital expenditure, since it is an improvement that extends the useful life of an asset -- especially since we paint fences and buildings only every 5 years or longer.

DavidW5 (North Carolina)
Posts: 565

Posted:

see this previous thread:

http://www.hoatalk.com/Forum/tabid/55/forumid/1/postid/103517/view/topic/Default.aspx

PetunkaM (Florida)
Posts: 1,009

Posted:

Carol,

Our HOA By-laws require us to manage at least two separate reserve accounts: 1. Deferred maintenance. The reserve for deferred maintenance includes funds for maintenance items that occur less frequently than annually. We use this fund to paint buildings. 2. Reserve for Replacement: include funds for repair or replacement required because of damage, depreciation or obsolescence. We are not required to fully fund the reserve funds as described in Chapter 720.

SteveJ8 (Florida)
Posts: 5

Posted:

It is true that the IRS does not allow assessments to be treated as capital contributions and set aside for painting. The IRS considers painting to be an operating item, of a 'cosmetic' nature.

Capital contribution treatment means that the portion of dues/assessments set aside in reserves is not taxable income to the Association. That is, if the requirements of the appropriate revenue rulings are met. This treatment is allowed for items like roofs, exterior siding, paving, swimming pools, tennis courts, and other building components with a long life.

As a CPA practicing in this area, I advise my clients to set up a separate painting reserve. This is another bank account in addition to the accounts in which the other reserve funds are deposited.

Florida statutes and rules allow nonstatutory reserves, in addition to those which are mandated. I would think this is the case in other states as well.

Steve Jones, CPA
Pensacola FL

BruceF1 (Connecticut)
Posts: 2,535

Posted:

Quote:

Posted By SteveJ8 on 08/12/2011 4:10 PM
It is true that the IRS does not allow assessments to be treated as capital contributions and set aside for painting. The IRS considers painting to be an operating item, of a 'cosmetic' nature.

SteveJ8,

I don't know where that claim comes from. The only thing I know about the requirements pertaining to an HOA is contained 26cfr1.528. The two attachments below are two sections. You might do a search for 26cfr1.528 to see if you can dig anything else up.

📎 Attachments (2):

⏸ Downloads temporarily unavailable

📄18123352571.pdf(27 KB)

📄181233511854.pdf(50 KB)

SteveJ8 (Florida)
Posts: 5

Posted:

Quote:

Posted By BruceF1 on 08/12/2011 4:33 PM

I will and get back to this thread. Internal Revenue Code Section 528 is an elective method for Associations who choose to be taxed following its rules. If the election is not made (by filing Form 1120-H), an Association is taxed as a regular corporation (Form 1120) and is also subject to Section 277 (relating to certain membership organizations).

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