Use of Reserve funds

Started by RobertG12 • 4 replies • 1611 views

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RobertG12 (Arizona)
Posts: 160

Posted:

I know that years ago reserve funds had to be separated completely from regular income/expense funds. I had thought that had changed but I would like to get an update, so several questions.

1. Can reserve and regular funds be co-mingled in the same bank account?
2. If you run out of regular funds before the end of the year, can you take funds from the reserve fund to pay the bills?
3. If you have extra income left over at the end of the year can you put the funds into the reserve (avoid paying taxes?)?

I am sure there are some other questions, but answers to these would be really helpful.

SteveM9 (Massachusetts)
Posts: 3,699

Posted:

1. Can reserve and regular funds be co-mingled in the same bank account?
2. If you run out of regular funds before the end of the year, can you take funds from the reserve fund to pay the bills?
3. If you have extra income left over at the end of the year can you put the funds into the reserve (avoid paying taxes?)?

1. In some states, no. To keep it clean, I would at least get a savings account for free. Keep the reserve and operation expenses separate. Keep them at the same bank if you want to keep it simple.
2. Yes, most of the time. See your CCR's
3. You are only charged income on your interest from the bank. You don't need to transfer it all to the reserve for any reason and start the next year at zero.

RobertR1 (South Carolina)
Posts: 5,164

Posted:

RobertG,
If I were to draw a conclusion from the posting on this site, I would say a lot do what they can get away with.

But, of course some documents are stronger than others and some documents are ignored totally.

For a quick fix(answer) use search box this page and see if anything is specific to AZ. I am sure you will receive some solid specific AZ help from Mary for one, or maybe Joanne will chip in.

Another consideration is where is your association in terms of how you built your reserve fund, what guidelines did you use?

There is a lot of stuff here about Reserve funds and not doubt the process is greatly influenced by state statute and documents of association. I would also believe the increase in any reserves could be handled by the Board whereas the decrease might need owner approval.

MaryA1 (Arizona)
Posts: 7,043

Posted:

Robert,

As I'm sure you are aware, AZ does not have any statutes that apply to reserve funds. Unless your gov docs have specific requirements, restrictions, etc., IMO, the board can do as they please with reserve funds. I know of no IRS requirements regarding reserve funds.

My answers to your questions would be:

#1: Operating funds and reserve funds should be in separate accounts. Because the reserve funds are not used on a regular basis they are best invested in interest bearing accounts, i.e. savings, money market, CDs.
#2: Generally speaking, the reserve funds should not be used to pay for operating expenses; however, if they are used in an emergency situation the reserve fund should reimbursed as soon as possible
#3: Any excess funds at year end can be depostited in the reserve fund; however, this most likely will not have an effect on taxes. HOAs are only taxed on non-exempt function income, i.e. interest income. Realizing a net profit at year end does not result in a tax obligation as would be the case with a for-profit corp.

GordonD1 (California)
Posts: 131

Posted:

Robert,

My answer for the State of California: Please double check all of my answers. Every State is different.

1) No

2) Yes from the Miscellaneous Accounts (Make sure that your Reserve Study Analysis is properly adjusted and your accountant also is aware and notes this in the Audit Financial Report

3) Yes (Always with the advise of our CPA/Accountant)

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