HOAleader.com - Tip of the Week - April 8, 2011
Published: Fri, 04/08/11
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Do You Know What Qualifies as an "Exempt" HOA Expense for
Tax Purposes?
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Let's get into the spirit of the season, shall we? You'll have
more "fun" handing your HOA's taxes if the rules don't seem so
foreign. This week's tip makes spotting exempt expenses under the
90-percent rule easy.
Let's start with some basic HOA tax information. To qualify to
file Form 1120-H under IRC 528, your association must meet the
following requirements:
1. The substantial majority of units, 85 percent, must be used
as residences.
2. More than half, 60 percent, of the association's gross
income must be exempt, which means it's received from owners
in their capacity as association members, rather than from
them as customers for goods or services.
3. At least 90 percent of the association's expenses must be
exempt, which means they're operating and capital expenses
that directly affect association property.
4. Residual income can't be used to benefit members.
When it comes to meeting the third requirement, what association
expenses qualify as exempt? "Basically, exempt expenses are
anything for the acquisition, construction, management,
maintenance, and repair of association property," says Robert
Galvin, a partner at Davis, Malm & D'Agostine PC in Boston who
specializes in representing condos and co-ops. "Exempt
expenditures are things like insurance, maintenance of the
common areas, snow plowing, payroll for the normal management
of the building, security, water, and sewer, things of that
nature."
Robert M. Anderson, a staff attorney at Nexon Pruet in
Charleston, S.C., agrees. "The regulations give us a good
definition of what qualifies as an expenditure under the
90-percent rule," he explains. "For 13 examples of what
qualifies under the rule, go to Treasury Regulation 1.528-6(c).
The main exclusion is for investments or transfers of funds to
be held to meet future costs. If you have a rainy day fund into
which you put money, that money can't be counted as an
expenditure. For example, transfers to a sinking fund account
for the replacement of the roof, even though the roof is
association property, wouldn't be expenditures."
But there's a twist! To learn about a subtle nuance in HOA tax
law, see our new article:
http://www.hoaleader.com/members/560.cfm
Best regards,
Matt Humphrey
President
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Recent articles posted at HOAleader.com:
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HOA Taxes: What's Exempt Under the 90-Percent Rule?
You have two options when you file your HOA's tax return. One is
to file as a corporation, and the other is to file under Section 5
28 of the Internal Revenue Code. Most associations opt for the
Section 528 treatment because if almost all your HOA's income is
from assessments and almost all of your expenses are for
maintaining association property, you don't have to pay taxes. To
qualify under IRC 528, your association must meet several
requirements, one of which is that at least 90 percent of your
association's expenses must be exempt, which means they're
operating and capital expenses that directly affect association
property. But which expenses are exempt, and which aren't? Here's
a rundown.
Click here to read full article:
< http://www.hoaleader.com/members/560.cfm >
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Creating New HOA Rules? Should You Grandfather or Not?
Let's just say the dog situation has taken a turn for the worse,
and many of your HOA's owners want to change your rules to ban
dogs. Naturally, dog owners are aghast and want to be "
grandfathered" into the rule, meaning that they'd be exempt.
Should you grant their request?
In this week's
Click here to read full article:
< http://www.hoaleader.com/public/559.cfm >
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Four Examples of Smart HOA "Grandfathered" Rules
Here, we discuss the pros and cons of creating exceptions for
rules, give four examples of when it's smart and not smart to
grandfather residents in, and provide tips to ensure the
grandfathered rules don't last forever and are enforceable.
Click here to read full article:
< http://www.hoaleader.com/members/558.cfm >
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HOA Foreclosing to Rent Units? First, Know the Risks
In this week's tip, we suss out the pros and cons of whether to
foreclose on a delinquent owner with the intent to rent out the
unit to recoup your HOA's fees.
Click here to read full article:
< http://www.hoaleader.com/public/554.cfm >
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How Should an HOA Divide Repair Costs? Discussion Forum Follow-Up
A reader asks, "Our HOA has both condos and stand-alone homes.
The condos vary in size, as do their roof and siding areas. They
pay an additional assessment for the HOA to take care of many
items, including the roofs and siding. When the roofs have to be
replaced, does the HOA decide whether all the condos will pay an
equal assessment or one based upon their respective roof areas?
The CC&Rs and bylaws are ambiguous. Also, it is the contention of
the board that it has the authority to mandate the replacement of
roofs when necessary rather than having a vote by the condo
owners." Here, our experts offer their insight on allocating
repair costs and determining when owners' input is required for
expenses.
Click here to read full article:
< http://www.hoaleader.com/members/557.cfm >
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