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Fed Income Tax on non-profit Homeowners Association

 
 
Bill
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      03-27-2006, 06:40 PM
The community in which I live is governed by a Homeowners
Assn, which is registered as a Florida non-profit
organization.

Issue has arisen regarding taxes which might be due on
"Reserve Funds." Since the Assn owns the paved roads, plus
retention ponds, there is a need for building up
considerable reserves in order to fund periodic maintenance,
and occasional major resurfacing (roads) or
re-engineering/rebuilding of ponds.

Past Board policy has avoided building reserves -- because
of the belief that they would have to pay taxes on them.

Does anyone know what FIT law is in this area? Since we're
talking upwards of $500,000 potential obligation for the two
projects, the annual tax "cost" would be significant --
probably larger than the total budget for normal yearly
expenses, so this has deterred Board from building reserves.

Since the ByLaws also _require_ the Board to maintain these
facilities, there is clearly a Catch-22, if FIT is due on
the reserve funds or interest earned as they accrue in
preparation for meeting the obligation to rebuild and
maintain.

Does anyone have an answer to this? A cite would also be
appreciated.

Bill

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Dick Adams
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      03-29-2006, 07:51 AM
Bill wrote:

> The community in which I live is governed by a Homeowners
> Assn, which is registered as a Florida non-profit
> organization.
>
> Issue has arisen regarding taxes which might be due on
> "Reserve Funds." Since the Assn owns the paved roads, plus
> retention ponds, there is a need for building up
> considerable reserves in order to fund periodic maintenance,
> and occasional major resurfacing (roads) or
> re-engineering/rebuilding of ponds.
>
> Past Board policy has avoided building reserves -- because
> of the belief that they would have to pay taxes on them.
>
> Does anyone know what FIT law is in this area? Since we're
> talking upwards of $500,000 potential obligation for the two
> projects, the annual tax "cost" would be significant --
> probably larger than the total budget for normal yearly
> expenses, so this has deterred Board from building reserves.


I have not researched this at all, i.e., my comments are
based on my interpretation of common sense.

Any homeowner can set aside funds for maintenance. Since
these funds are post-tax dollars, they are only subject to
taxation on the interest. The same should be true for an HA
as long as they are post-tax dollars. There might be a
glitch for commercial owners, but the bookkeeping problem for
that belongs to the commercial owner and not to the HA.

Now $500,000 is not chum change even if it is divided 100
ways. As a matter of fact, the more ways you divide it up,
the more effort and the more expense are involved in
collecting it on a timely basis. I served on the board of
an HA and the biggest problem we had was arrearages.

In my rarely humble opinion, your HA would be well-advised
to retain a Certified Public Accountant, an Enrolled Agent,
or a tax attorney who has several HA clients. I suspect the
State of Florida maintins a list of HA's and it would be a
clerical task to contact those in your area and inquire as
to from whom they get their tax advice. You are dealling
with big bucks so make certain you are hiring someone with
documentable expertise.

Dick

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<< and does NOT constitute legal OR professional advice. >>
<< >>
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cballard@tyyni.net
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      03-29-2006, 07:51 AM
Bill wrote:

> The community in which I live is governed by a Homeowners
> Assn, which is registered as a Florida non-profit
> organization.
>
> Issue has arisen regarding taxes which might be due on
> "Reserve Funds." Since the Assn owns the paved roads, plus
> retention ponds, there is a need for building up
> considerable reserves in order to fund periodic maintenance,
> and occasional major resurfacing (roads) or
> re-engineering/rebuilding of ponds.
>
> Past Board policy has avoided building reserves -- because
> of the belief that they would have to pay taxes on them.
>
> Does anyone know what FIT law is in this area? Since we're
> talking upwards of $500,000 potential obligation for the two
> projects, the annual tax "cost" would be significant --
> probably larger than the total budget for normal yearly
> expenses, so this has deterred Board from building reserves.


Note that non-profit (a particular type of corporation under
state corporate law) is not the same as tax exempt (which
can be bestowed only by Congress or the IRS). In the case
of a homeowners association, the Internal Revenue Code
provides that a qualifying corporation can elect each year
to be treated as either taxable or tax exempt. If the
association elects to be taxable it must file Form 1120, if
it elects to be tax-exempt it must file Form 1120-H. (In
Congress's strange way of doing things, tax-exempt for a
homeowners association is not 100% tax exempt, see below).

In order to be allowed to elect tax exempt status, the
homeowners association must meet two tests, the source of
income test, and the expenditure test. Under the source of
income test, at least 60% of the income for the association
for the year must come from owner dues, fees, or
assessments. Under the expenditure test, at least 90% of
the expenditures for the year must be for the acquisition,
construction, management, maintenance and care of
association property. (This provision does not require you
to spend 90% of your income each year, just that 90% of
whatever you do spend must be spent for association
purposes).

If a homeowners association qualifies to be tax exempt and
files Form 1120-H to make the election to be exempt for that
year, then the member dues, fees and assessments will all be
tax exempt income to the association as long as the dues fee
and assessments are not paid by the members in the capacity
of customers for services. Dues paid based on the value or
size of a member's property would be exempt income.
Incremental dues or fees based on the usage of a facility
would not be tax exempt.

Also treated as taxable income are interest, dividends, and
capital gains. The taxable income of an electing homeowners
association is taxed at a flat 30% rate.

So, you should be able to build up the reserves that you are
looking for without incurring any tax on the amounts paid
into the association. The association will have to pay tax
on the investment income earned by the reserves, if any.

--Chris Ballard

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<< and does NOT constitute legal OR professional advice. >>
<< >>
<< The Charter and the Guidelines for submitting >>
<< messages to this newsgroup are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
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San Diego CPA
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      03-29-2006, 09:07 AM
"Bill" <(E-Mail Removed)> wrote:

> The community in which I live is governed by a Homeowners
> Assn, which is registered as a Florida non-profit
> organization.
>
> Issue has arisen regarding taxes which might be due on
> "Reserve Funds." Since the Assn owns the paved roads, plus
> retention ponds, there is a need for building up
> considerable reserves in order to fund periodic maintenance,
> and occasional major resurfacing (roads) or
> re-engineering/rebuilding of ponds.
>
> Past Board policy has avoided building reserves -- because
> of the belief that they would have to pay taxes on them.
>
> Does anyone know what FIT law is in this area? Since we're
> talking upwards of $500,000 potential obligation for the two
> projects, the annual tax "cost" would be significant --
> probably larger than the total budget for normal yearly
> expenses, so this has deterred Board from building reserves.
>
> Since the ByLaws also _require_ the Board to maintain these
> facilities, there is clearly a Catch-22, if FIT is due on
> the reserve funds or interest earned as they accrue in
> preparation for meeting the obligation to rebuild and
> maintain.
>
> Does anyone have an answer to this? A cite would also be
> appreciated.


Generally, the HOA must put it to the owners to vote on the
disposition of excess funds. The choices are 1) retain in
the HOA for future use and property improvements or 2)
return to the homeowners. If the owners vote to retain the
funds inside the association, then the HOA *may* be taxable
on the interest or other earnings of the reserves but is not
taxable on the build-up of the reserves in spite of the fact
that that build-up represents an excess of HOA revenues over
expenditures. HOA's are somewhat specialized entities and I
do not have any clients that are HOA's. This is a very
general discussion of the treatment of excess funds within
an HOA, I will certainly defer to others that chime in w/
more specific information.

<< ================================================== ===== >>
<< The foregoing is intended for educational purposes only >>
<< and does NOT constitute legal OR professional advice. >>
<< >>
<< The Charter and the Guidelines for submitting >>
<< messages to this newsgroup are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
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Paul Thomas, CPA
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      06-02-2006, 06:34 AM
"Bill" <(E-Mail Removed)> wrote

> The community in which I live is governed by a Homeowners
> Assn, which is registered as a Florida non-profit
> organization.
>
> Issue has arisen regarding taxes which might be due on
> "Reserve Funds." Since the Assn owns the paved roads, plus
> retention ponds, there is a need for building up
> considerable reserves in order to fund periodic maintenance,
> and occasional major resurfacing (roads) or
> re-engineering/rebuilding of ponds.
>
> Past Board policy has avoided building reserves -- because
> of the belief that they would have to pay taxes on them.
>
> Does anyone know what FIT law is in this area? Since we're
> talking upwards of $500,000 potential obligation for the two
> projects, the annual tax "cost" would be significant --
> probably larger than the total budget for normal yearly
> expenses, so this has deterred Board from building reserves.


The homeowner dues are not income to the Association, and
therefore the accumulation of funds are not a taxable event.

Now, the interest earned on that money, if it is so invested
in like CD's, would be taxable income to the Association.

Take a look at the 1120-H. That's maybe the best way to go,
or you can elect to use the straight corporate form.

http://www.irs.gov/pub/irs-pdf/f1120h.pdf

The question does come to mind though, what have you been
doing all these years?

--
Paul Thomas, CPA
(E-Mail Removed)

<< ================================================== ===== >>
<< The foregoing is intended for educational purposes only >>
<< and does NOT constitute legal OR professional advice. >>
<< >>
<< The Charter and the Guidelines for submitting >>
<< messages to this newsgroup are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
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Bill
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      06-03-2006, 01:44 PM
(E-Mail Removed) (Paul Thomas, CPA) posted:
> "Bill" <(E-Mail Removed)> wrote:


>> The community in which I live is governed by a
>> Homeowners Assn, which is registered as a Florida
>> non-profit organization.
>> [elided for brevity]
>> Issue has arisen regarding taxes. Past Board policy has
>> avoided building reserves -- because of the belief that
>> they would have to pay taxes on them.
>> Does anyone know what FIT law is in this area?


> The homeowner dues are not income to the Association, and
> therefore the accumulation of funds are not a taxable event.
> Now, the interest earned on that money, if it is so invested
> in like CD's, would be taxable income to the Association.
> [Again, elided for brevity.]
> The question does come to mind though, what have you been
> doing all these years?


To answer your question:
The "old" board wasn't accruing any significant reserves. A
new president was recently elected and in seeking to revise
this stupid policy, sought my aid in convincing "old"
carryover members of their error.

Problem has been resolved, as several carryover members
resigned, and previous posters provided info similar to
yours -- so now the remaining problem is the need for
"special assessments" to cover for past errors.

Bill

<< ================================================== ===== >>
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<< and does NOT constitute legal OR professional advice. >>
<< >>
<< The Charter and the Guidelines for submitting >>
<< messages to this newsgroup are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
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