Assesment Credit

We have a small community in Odessa, Fl...41 homes. We took partial title on a foreclosed property and have been renting it for the past year which has given us a large surplus of funds. We have no assets to maintain in the community and we have ample money in reserves for insurance deductibles, bad debt, etc. We would like to give the money to the community but rather than lower the yearly assessment, we would like to give a 'credit' on each homeowners account for the coming year since if we just lowered the assessment it would be hard to raise it back up next year due to our bylaws. Another option is to mail out a "refund" check to each homeowner after the assessments are paid, although that is much more work and expense. Can anyone comment on whether either approach has legal restrictions? Can we simply credit the homeowners account and send the assessment bill with the reduced amount due?

Thanks !

Jim Martinelli
[email protected]

Jim - By assessments, do you mean yearly dues? If incorporated you may want to talk with an accountant or lawyer. If a non-profit corporation, this could possibly change your status. I am not a lawyer or an accountant, but this immediately came to mind.

Jim

My initial blush would be to use the excess for improvements, build a reserve, not raise dues, etc. Candidly I would not be refunding, crediting, rebating, etc.

While your association is financially ahead right now, there might come a time/issue, etc. when the excess is needed and it will be much, much harder to raise dues especially if there were "refunds" in the past.

Before you do a credit, you need to finalize your taxes with the HOA for the year. So you may not know what the "surplus" is until after you file taxes. Its likely you will have to pay income tax on the rent since it is outside of normal HOA business.

Your taxes will be very complicated this year. Its unlikely you will be able to file a 1120-H and need to file a 1120. Has your HOA been making quarterly payments to the IRS for the income produced by the rental? You may need to pay income tax on the HOA members dues as well if a high certain percentage of your income is from the rental.

Exempt income includes membership dues, assessments, fees and interest on those fees.

Non-exempt income includes interest and dividends, rental income from property owned by the association, and laundry/vending machine income.

You have a ton of tax work to do before you can issue any credit, or you will need to raise dues just to pay the IRS.

One other thing to consider before giving any sort of refund: A non-profit association can make money but it generally cannot pay a dividend. A refund could be seen as a dividend and put your non-profit status in jeopardy. Reducing or waiving assessments may avoid this problem. Since I am not an expert on such matters, I would recommend discussing your options with an attorney before taking any action.

IMO the first thing to consider is this money was not collected from the home owners. It was generated as income from a rental property due to a foreclosure. Therefore, IMO you have no obligation to make the owners "whole" as this was never "their" money.

Now after renting the property for one year I wonder just what LARGE amount of monry we are talking about? And why or how you can't simply keep this for some unforeseen expenses down the road. Like if and when you have other homes going into foreclosure.

The knee jerk reaction I have seen many times when a surplus builds up is to return the money to the owners. And IF and WHEN all other expenses are planned for maybe then you might consider rebating funds. One year's rental income does not IMO constitute an enormous windfall.

I would NOT refund the surplus. As mentioned it causes many issues for the property, for the property owners who may have claimed all or some of the dues they paid as a deduction. You will have to pay taxes on that income as it was not paid to the association by a member and IMO would be considered an outside source of income.

Like the advice I would give any property or individual today if you are lucky enough to have excess funds put them away and use them in the event some unknown expense comes your way. I would guess in the northeast portion of our country today their are few properties who now beleive they have to much cash on hand. Suddenly they have a use for any and all of it.

John,

I think you missed my point, so I will try again.

When the HOA was incorporated it most likely chose to be a non-profit corporation. I do not know about Florida, but in my state an HOA cannot be a business (for-profit) corporation.

The principal difference between for-profit and non-profit corporations is that a non-profit cannot pay dividends to its members (or other investors). Contrary to common belief, a non-profit can make a profit but the proceeds must stay with the association to carry out its work; the profits cannot be paid out to investors.

In this case, the HOA is earning a huge amount of income from the rental of a home. The rental income and the assessment income have created a huge surplus of cash. One proposal is to pay all or part of this surplus back to the homeowners/members. This could jeopardize the association's non-profit corporate status as it would then be paying out a dividend to the members from a surplus created by a business function of the association. The association would be doing precisely the thing that a non-profit corporation cannot do.

Depending on how much each member is paid, the association may have to file 1099's for each member. That will likely trigger some alarm bells at both state and federal levels. If you are acting as a business corporation, you can expect unwanted attention when you file tax returns for a non-profit.

There are other implications, too. Suppose one owner builds a fence and a shed, paints his house purple, and puts a 24-foot Penske truck on blocks in his front yard. If the the association attempts to enforce any of its rules, the homeowner could successfully challenge the action by arguing that the association no longer qualifies as an HOA under state law because the distribution of profits transformed it from a non-profit to a business corporation.

This is why I would strongly urge any association to seek out legal advice before paying surpluses back to its members.