Real Estate & Property Law

IRS RULING 70-604 - WHAT IS IT?

I am not a tax attorney. I am not a CPA. I will state that right off. However, it is my belief from everything I have read and heard about including the ruling that this is an important ruling, and HOAs and Condo Associations that file as same need to put an election to the members each year to vote on what to do about this resolution. It does not require the double envelope voting package, however, some associations do put it on the ballot with the other measures for the annual meeting for purposes of convenience (because people do not tend to come to meetings!).

Here is a question/complaint I received recently about this ruling and the homeowner election:

"They [meaning the association] put it on the ballot without ever explaining it to us. After all the ballots were submitted, they then explained what it was we were voting on.

Also, as far as the vote, they only gave us two options.
Rolling over the surplus, or not rolling over the surplus.
They never provided the option of having the surplus returned to us.

Seems to me they should have explained all of this before sending out the
ballots, or at least enclosed with the ballots."

I agree with this reader that this measure needs to be explained. As I understand it's origin, quite a few years ago the IRS started an effort to tax HOA assessments. After all, it would be quite productive, wouldn't you say? For the government at least; but obviously, it would place a huge burden on HOAs and COAs.

It did not seem fair to the industry folks and homeowners in HOAs or COAs to be taxed on money collected for maintenance on buildings and grounds, or even lawsuit proceeds that were intended for that purpose. After all, investors can write off these fees, and some (although I am NOT giving an opinion here and do not believe it myself - so consult your own CPA or attorney) believe homeowners can deduct them from taxes.

Anyway, the outcome was this ruling. HOAs and COAs must get approval of the members to either roll over any assessments collected and not used in one year into the budget for the following year, or put the excess money into the reserves, or else there is the possiblity of being taxed on the overage as a "profit". If there was a vote to return it to members, that would avoid the tax issue of course. However, in most cases that and more needs to be collected the following year either to pay the increase in the budget or to fund underfunded reserves, so it seldom happens that a board votes to return any overages. In fact, these days, overages are uncommon.

Approval of the election is important, whatever the measure. Not all experts agree on how to word the options regarding the overages, or which is more acceptable (roll into the operating budget or reserves) and what accounting entries are required. So there. I cannot answer that one for you. Work with your own (hopefully experienced, educated and HOA-savvy experts).

Full post as published by California Condo & HOA Law on March 26, 2009 (boomark / email).