Budget revisions

1 Our condo association BOD approves the budget.
2. The budget does NOT contain a line item for Major Repairs and Replacements Reserves.
3. We have never had a reserve study.
4. Assuming the co-owners approve the transfer of excess income of $100,000 from previous years in accordance with Rev. Ruling 70-604 to be applied against our current year assessments.

Question: is it permissible for the BOD to add a line item for Major Repairs and Replacement Reserves in the same amount ($100,000)? By doing so, the assessments would remain the same.

Thanks so much for any insight you can provide.

Jan - are you saying you had "excess" of 4100,000 in your account and you think the association may want to apply that against the assessments, so they will not have to individually pay their assessments this year?

But the Board wants to establish a Reserve Fund with that money instead?

In any case, ALL funds held by the association need to be "designated."

To have $100,000 just laying around is not a good idea.

Jan,

What decrease in assessments?

Jan,

I don't know who is preparing your budget but, IMO, they need help! You do not decrease the amount of assessments to be collected by the amount of excess income from the previous year. The budget line item for Assessment income is based upon the amount of the yearly assessment x the number of members. That figure should not be reduced unless the assessment amount has been reduced! The budget is prepared based upon the income expected to be received in the coming year and the anticipated expenses.

I don't agree that the excess funds should be returned to the member. In light of the fact that there is no reserve fund, these funds should be used as "seed" money to establish one. Not being familiar with the gov docs in question, I'm not sure the members would have to agree to the establishment of a reserve fund. Frankly, if I was a member of this assn I would certainly be asking how on earth we could have excess funds in the amount of $100,000 (1/3 of the assessment income!) for one year! This really boggles my mind. My assn has an $800,000 budget and I would be shocked to see an excess of $100,000 for one year. Doesn't the board keep track of the variances from month to month?

It sounds like a simple new designation of the income on a budget. the associaiton needs a reserve and sounds like in fact they have it they just have not designated as such. There is no extra money anywhere as I read this. Unless the owners are wanting the dues reduced by the $100K per year over all units, then what they are doing is a good thing for the association and hopefully they will now be wiser and allocate a portion of dues to the reserves each year. an association budget should be a zero balance budget with any and all anticipated excess going into reserves every year as well as a specific portion each month. If the membership is agitating to have dues reduced by this amount and using it to offset operating income for the year, then the membership needs an education in reserves and the effect of not having them in place ie. special Assessments and inability to sell or refinance. Teh lenders are getting harder on authorizing loans in associations with no or low reserve funds as well as high rental percentages.

To clarify: We have never had a reserve study; a reserve has never been budgeted/established; and our bylaws require compliance with Rev. Ruling 70-604.

As nearly as I can determine Rev. Ruling 70-604 gives two options: 1) refund the excess (as in send a check) or 2) apply the excess to the next year's budget. Transferring the excess to a reserve is not sanctioned by the IRS.

Hope this helps - and thanks to all for your input.

Mary -

Rev. Ruling 70-604 does NOT pertain to our taxes - Form 1120-H has always been filed. We are required to follow its provisions solely because of the Corporate Bylaw which states:

"At each annual meeting of members a report shall be presented setting out the amount of excess assessments for the immediately preceding taxable year determined pursuant to the provisions of Revenue Ruling 70-604, as amended by any subsequent Announcement or Ruling of like substance and import, together wth a statement setting out the balances in the various reserve fund accounts as of the last day of such immediately preceding taxable year. The members shall then determine by majority vote whether to refund or rebate to the Co-Owners all or any portion of the excess assessments allocated to the general fund for such immediately preceding year and all or any portion of the reserve fund accounts, whether arising out of excess assessments for the immediately preceding taxable year or years prior thereto. To the extent any portion of such excess assessments and reserve fund balances are not refunded, they shall be retained by the Association for the current taxable year for the purposes previously authorized until the next succeeding annual meeting of members held pursuant to these by-laws."

An excellent article by Gary Porter, CPA discusses in detail 70-604. The link to the article is www.porterandcompany.com/Articles/IRSReconsidersRevRul70-604.pdf.
The next to last paragraph on page 2 is most pertinent.