Cart Before The Horse?
Hi Dennis
Recently, the BOD for our Planned Community voted in favor of a 10% increase in Common Assessments as well as Court Home Assessments to become effective Jan 1, 2023. My question is whether or not this can be voted on before the 2023 Budget had been approved? In fact, at the time of this writing, that budget is still unapproved.
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Rhonda,
You are quite right. The association has the right to collect assessments based on the projected needs for the coming year I cludi g any money to be put aside for the reserve fund. But the assessment must be based on that projected budget and once that is finalized the required assessment necessary to satisfy that budget is determined. This is how it should be done but nothing in law requires this process. Just common sense. Unfortunately there is very little of that available in these communities. Far too many board us the approach of your board and figure out what they want to charge the homeowners in assessments then Crete a budget that distributes all that money into the various bins. They often use some arbitrary increase allowed in the CC&R’s instedy or really trying to figure out a reasonable budget . Associations have to be careful because any excess funds at the end of the year have to be either returned to the homeowners or used to offset future assessment the following year or they pay taxes on those profits. Under IRS rules.
Dennis
Thank you for responding, Dennis. The more I read the information the more I am left feeling confused by the IRS rule regarding return, be taxed, or use to offset following year’s assessment. I don’t see the mechanics of how a homeowners’ group trying to make sure the board is accountable can ever wade through whether or not this rule is being applied and it is the “or used to offset future assessment the following year” that has me hung up. Couldn’t a board simply say things like “we are only going to raise by 8%” the next year and make it look like they are being financially responsible, even though they are still just continuing the cycle of imposing fees without being actually led by a planned use for the money via a sound budget?
Also, I believe I read it on your site, but isn’t it true that it is the fiduciary duty of the board to budget according to actual community needs and if that budget demonstrates that there is a shortfall, the board should be bound to the task of asking for an actual appropriate assessment increase to cover the planned maintenance throughout the community, thereby sending the assessment increase to member vote if it exceeds CC&Rs or State limits? And, I assume that if the vote fails, they can return to the previous limits (CC&R/State) without vote.
What we have in our community at this point in time is a lot of needs but a greater message from our board that there is no money to pay for those needs. That suggests to me that they are blatantly ignoring the duties of their positions as board members, would you agree?
Rhonda,
I’m not going to comment on motivation or issues in your community that I know nothing about other than what you tell me. As I mentioned before the association has a right to raise the necessary money to maintain the community and deal with its expenses including applying money to the reserve accounts. To do that they must establish a budget based on those projected needs and then determine the amount that needs to be raised based on that budget projection. Any CC&R or state limitation on assessment increases then applies to that determined assessment amount. The IRS issue is an aside and based on IRS rules. While I believe that most associations violate those rules until the IRS audits these communities or someone reports their association to the IRS they will continue to get away with it. What the association needs to look at is how and on what are they spending their money and looking for the most efficient way to meet the needs of the community within the available spending power of the community. This is what any business would do to eliminate waste and maximize profits, but here we are not looking for profits simply looking to manage and pay for expenses. When association start taking their money management responsibilities seriously instead of simply tapping the endless capability of the homeowners to pay more assessments based on their wasteful spending habits. There will never be peace in these communities. The board has a clear fiscal responsibility to the homeowners and need to recognize that fact and act on it.
Dennis
Dennis, this is fantastic information. Thank you for sharing. Can you point me in the direction of the specific IRS rule? I believe my association may have has much as $100,000 in excess operating funds this year and they just voted to approve an increase that adds an additional $96,000 to the operating funds for next year.
Amy,
HOA and Condominium taxes are covered under section 528 of the IRS code. Associations are allowed to choose to file their taxes using two separate forms 1120H or 1120. With 1120H any taxable income is taxed at 30%, with form 1120 any taxable income under $50,000 is taxed at 15%. Most associations benefit from filing 1120H if they qualify to use that form, but they must qualify on several requirement to be able to use that form. If the association choses to use form 1120, there is also a significant IRS ruling 70-604 that addresses the taxability and handling of any excessive income at the end of the year. These ruling states, that the members alone must vote to either refund excess income back to homeowners or use it to reduce assessment the following year, annually. It has been my long-standing belief that most associations that file form 1120, and their CPA’s have very little understanding and the correct application of Revenue Ruling 70-604 and have thereby violated IRS law and misreported taxable income. If your association routinely transfers excess operating money to the reserve fund at the end of the year, they are most probably violating Federal law irrespective of what form they use.
Dennis
Dennis
Thank you so much for the info!!!