HOA Casulaty Loss

Started by MichaelM55 • 9 replies • 225 views

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MichaelM55 (Florida)
Posts: 3

Posted:

We have a community of 50 homes in SW Florida. The homes and common areas suffered damage in Hurricane Helene and Hurricane Milton which were Federally claimed disasters. Most of the damage in the common areas was loss of trees and signs. Let's say there was $150k damage, most of which was damage to 50 ft palm trees.

Since the HOA is non-profit and pays no taxes, can the HOA legally "distribute" this $150k casualty loss to the homeowners with each getting 1/50th of the $150k loss or $3000 casualty loss to deduct (if applicable) on their individual taxes?

SheliaH (Indiana)
Posts: 6,964

Posted:

That's a legal question and best suited for an attorney- probably a tax attorney and an accountant. If you give this monet to the homeowners, it will be considered by tge IRS and they'd have go declare it on their income taxes. That may or may not be a good idea, depending on what's going on with their personal finances..

Since this was covered by the master insurance policy, why aren't you considering using the money to replace the signs and replant the trees anyway? If you dont want to do that, perhaps you could consider so e sort of improved that could make the common areas more hurricane resistant.

If it is not right do not do it; if it is not true do not say it. Marcus Aurelius

MichaelM55 (Florida)
Posts: 3

Posted:

This issue may indeed best be answered by an attorney, CPA, or tax attorney but it is an important issue for HOAs and members to understand. Done properly and legally, this could save the HOA members thousands of dollars.

I believe that current tax code only allows deduction of casualty losses on personal property (non-business or rental) in areas that have been declared disaster areas by the Federal government. Even if the common areas are insured, the deductible on the insurance policy may be classified as a casualty loss. The $64,000 question is whether or not the HOA can "distribute" the loss to the "owners" of the common areas, after all, it is the homeowners that fund the restoration of damage.

Surely an HOA in fire, flood, or hurricane disaster have addressed this issue. Can you share your learnings with us?

BTW, this has nothing to do with the HOAs paying homeowners anything, it's all about allowing the homeowners to deduct losses for which they are entitled.

ElleN (Idaho)
Posts: 1,334

Posted:

Quote:

Posted By MichaelM55 on 11/05/2024 12:31 PM
We have a community of 50 homes in SW Florida. The homes and common areas suffered damage in Hurricane Helene and Hurricane Milton which were Federally claimed disasters. Most of the damage in the common areas was loss of trees and signs. Let's say there was $150k damage, most of which was damage to 50 ft palm trees.

Since the HOA is non-profit and pays no taxes,

Not so. Whether the HOA owes federal or state income tax just depends. There is no blanket exemption of HOAs from income taxes.

LetA (Nevada)
Posts: 2,679

Posted:

I would guess that answer is no, you would likely deposit the insurance settlement check in your operating expense account, and
use those funds to replace what was damaged in the storm.

DeanJ
Posts: 1,786

Posted:

You could deposit the funds into the general operating account and provide a credit to the homeowners account.

MichaelM55 (Florida)
Posts: 3

Posted:

It appears that the meaning of "Casualty Loss" is not well understood. Per the IRS: A casualty loss can result from the damage, destruction, or loss of your property from any sudden, unexpected, or unusual event such as a flood, hurricane, tornado, fire, earthquake, or volcanic eruption. A casualty doesn't include normal wear and tear or progressive deterioration.

If the reduction in the Fair Market Value of the property exceeds the insurance settlement, then there is a casualty loss.

I question I'm asking, is whether or not that casualty loss can be assigned to the homeowners who are the "owners" of the property/facilities.

LoriM15 (Florida)
Posts: 1,009

Posted:

Where is the $150,000 to pay for this loss coming from? Did you do a special assessment or was there money in the budget?

I am not an attorney or a CPA and that's where you need to go with this. However, I don't believe the homeowners in the association are considered owners of the common areas. They own their homes, and they own a general interest in the common property, but in order to use that deduction I think you might have to be able to point to actual land and and say that's mine and I want to deduct a loss for it. I could be really wrong. I believe the corporation owns all the common areas and the homeowners are members (shareholders) of the corporation.

It's definitely creative thinking but I don't believe the IRS would go for this, or there would be a heck of a lot of other HOAs doing this. We had $500k in damages after Ian (also in SW Florida) and it would have been nice for our owners to get a tax deduction from it. I have never heard of any of the HOAs and COAs in our area using that logic.

DeanJ
Posts: 1,786

Posted:

Quote:

Posted By DeanJ on 11/05/2024 8:19 PM
You could deposit the funds into the general operating account and provide a credit to the homeowners account.

Misunderstood the original post.

I don’t believe you can distribute a loss from a non-profit to owners because the HOA.

GregoryT1
Posts: 315

Posted:

I wonder if your docs willl allow that. However my docs goes into details when there is insurance compensation and what you can do.

This link might be applicable.

https://beckerlawyers.com/comingling-of-funds-questioned-news-press/

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