HOAleader.com - Tip of the Week - March 23, 2012
Published: Thu, 03/22/12
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What's a Small, Self-Managed HOA to Do with Its Reserves?
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In this week's tip, we offer insight to an HOAleader.com
reader at a 32-owner, self-managed HOA in Virginia. Our
reader wants to know how investing his HOA's reserves in
an interest-bearing account or certificate of deposit will
affect his HOA's nonprofit status.
Let's give the quick and easy answer first. "It depends
on the laws of your state, but in California at least,
having and earning interest won't violate your nonprofit
status," says James R. McCormick Jr., a partner at Peters
& Freedman LLP in Encinitas, Calif., who represents
associations. "Nonprofits can, in fact, make a profit."
Eric Gould, a lawyer at Couzens Lansky in Farmington
Hills, Mich., who represents as many as 10 condos or
HOAs at any given time, concurs. "The simple answer is
that no, investing your HOA's reserves in an interest-
bearing account or CD won't not jeopardize or terminate
your HOA's nonprofit status," he says. "That said, it's
probably worthwhile as part of the board's best practices
or an occasional review--if it hasn't been looked at in
a while--to ensure that indeed the appropriate election
was made with the Internal Revenue Service as an exempt
home owners association. Sometimes everyone thinks it's
filed that way, but it may not be."
"That's the basic answer," adds Gould. "But there's a
lot more that goes with that."
The fact that your nonprofit status isn't threatened
doesn't mean you don't have any tax issues from such
an investment. "HOAs, at least under the federal tax
scheme, don't have income based on what they take in
and pay out from their members," explains Gould.
"But if they do have an investment, the interest they
earn will be subject to tax. It won't jeopardize their
nonprofit status, but it will create potential tax
liability for the income they earn."
There are ways around that tax liability. "One way to
minimize that exposure is to determine if there's a way
to invest through a nontaxable account, like some type
of fund based on municipal interest," says Gould.
"If the investment is tax exempt--but even if you put
your funds in a bank account or a CD--your HOA won't have
much income and tax liability. But there may be a way
to invest that generates tax-free income, and the rate
of return may not be all that much less than other
investments would provide."
What if your HOA wants a greater return than with
conservative investments like bank accounts, CDs,
or municipal bonds? Find out about investment risks
in our new article,
Smart Reserve Investments for Small, Self-managed HOAs
http://www.hoaleader.com/members/695.cfm
Best regards,
Matt Humphrey
President
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