HOA collecting money that won't be used this year

Judy

They might well call it many things. Our declarant originally called it a Roofing Fund.

They have to report such on tax returns.

Overall, I think they might be doing the right thing. I would be especially nervous if no money was set aside. Just keep an eye on it.

Our independent auditor, every year in the audit report, recommends that we establish, through the budget process, an operating contingency of between 10 and 20% of our annual dues. This means that we budget for funds that are not intended to be spent in the current year but that go toward building up the operating contingency.

The prudence of this practice was demonstrated during the winter of 2009-2010 when we had three snowfalls of over 20". We were able to cover the massive snow removal costs without having a special assessment.

Judy - could you give us more information? Is this a special assessment, and what did the board state is the reason for this? Are you a condominium association or an association of individual lot/home owners?

Judy

They can collect and hold money. Several of us have tried to make that clear to you. Can we make it any clearer?

Now it must be accounted for and carried forward for future expenses and heck yes let it earn a little bit until we need it.

Got a pool? What if it cracks tomorrow? Where does the repair money come from?

Got a sprinkler system? What if stops operating tomorrow? Where does the repair money come from?

Got a clubhouse? What if a toilet plugs the afternoon of a function there that evening? Where does the repair money come from?

Who owns the streets, sewage system, etc.? Ever think they will need replacement?

Ever hear of a rainy day fund?

Once again. Money can be carried forward. It is not really a profit and if done properly taxes do not have to be paid on it. It is set aside for emergencies, anticipated future repairs, enhancements, etc.

Judy,

Not only can HOAs set money aside for future use, in most cases they must do it. Usually, money set aside for future use is placed into a separate account called a reserve account, or a capital reserve account, but it could be called something else. That money is usually placed in an interest bearing account, or it may be placed is some other FDIC insured account such as CDs.

Mortgage lenders generally want to be sure that HOAs have adequately funded reserves to meet future capital expenditures such as road repair (repaving), roof repair or replacement, etc. The FHA, Fannie Mae and Freddie Mac all require that HOAs have adequately funded reserves before they will underwrite loans for lenders. Usually, they like to see 10% of the annual budget set aside each year, unless a reserve study shows that more or less is required. How much is actually needed will depend on the nature of the common elements in your community, what will be required for repair/replacement in the future, and when.

If mortgage lenders feel that the HOA does not have adequately funded reserves, they can refuse to write mortgages for buyers of homes in that community. In other words, assuming you got a mortgage when you bought your home, if your association did not have adequately funded reserves, you might not have been able to buy your home there.

Judy,

I guess I may have to back off on this statement. After doing a little thinking and some research, I'm not so sure. I've only done a few trust tax returns and all of those have been with either grandchildren or nieces or nephews as the beneficiaries.

On the surface, it seems like a legitimate way to save paying taxes on interest income. Interest income received by a homeowners association is taxed at 15% on all income over $100. A trust is allowed a $600 exemption, thus it would pay 15% tax on all income between $601 and $2900. So, on the surface, it seems OK.

But, according to some tax notices I reviewed, trusts which are set up to conceal the true ownership of assets to avoid the payment of taxes on income earned by those assets are considered abusive and are illegal. So, while on the surface it seems OK, the IRS may see it differently.

So, I guess the answer to the question, "is it legal", is, I don't know. I guess if either the association or the trust is ever audited by the IRS we'll find out, won't we?

Yes, I too believe Judy is thinking that by setting money aside for the future the association is earning a "profit" and she thinks that may be illegal. I, too, have pointed out (see my earlier posts) that is perfectly legal, is not necessarily taxable, and that many lenders even require that there be reserves for future expenditures.

However, in her OP she also mentioned it was a trust account and not a reserve account. That got me thinking, if true, why do that? The short answer, to save on income taxes, of course! But, later I realized you likely can't do that. So, what the association is doing may be illegal, but not for the reason that Judy was originally thinking. I posted that information before somebody got the bright idea to try a similar stunt.

Tim,

I agree, that's another possibility. But in a trust account? Hmmm, I dunno. A trust where the grantor and the beneficiary are the same sounds suspicious to me, although I think I've seen it done, but I believe in that case the grantor/beneficiary reports the income earned on his/her personal tax return each year. I don't see where that benefits an HOA. I would need to know more. I think I'll run this by my boss, who's a CPA, today and see what he thinks.

That's why I said I would need to know more. In an earlier post I indicated that if the money was "truly" in a trust account, then. . . - I was leaving open the possibility that someone was simply referring to it as a trust account, but that the account may not have been set up as a real trust account.

However - - - -

I had missed where you said that. I found it when I went back through the thread.