A condominium reserve fund is a fund used for major repairs of the capital assets of the corporation. The money deposited into the fund comes from a portion of the money paid by unit owners for either common expenses or by way of special assessments (plus any interest or investments that are legally allowed).
What is a reserve fund expense?
A reserve fund sets aside money for covering scheduled, routine and unscheduled expenses that would otherwise be drawn from a general fund. Because expenses may arise unexpectedly, a reserve fund is typically kept in a highly liquid account, such as a savings account.
How much reserve should a HOA have?
Ideally, the HOA wants to have a 100% funded reserve meaning that it has enough money to cover all anticipated costs. However, having at least 70% is a good start. Less than that and the HOA runs the risk of having to implement special assessments or raise association fees to cover costs.
What happens if a condo association goes broke?
When condominium associations file for bankruptcy, they usually file for reorganization under Chapter 11 of the United States Code. Reorganization allows an association to restructure its debt under the protection of an automatic stay that halts collection proceedings during bankruptcy.
Why do condo associations have a reserve fund?
It also enables the board to spread repair and replacement costs between current and future unit owners. There are other reasons for having a reserve fund. It allows the association to maintain the aesthetic quality of common areas by keeping them in a state of good repair.
Is the Hoa reserve fund taxable income?
First, if reserve money is not in a separate account, the IRS can look at it as taxable income to the HOA. Second, it’s absolutely essential to keep track of what comes in and goes out of the HOA.
What should be included in a condo association budget?
In summary, condo association boards must take into account a number of factors in order to properly fund the association operating budget and reserves. And proper planning and funding results in the least amount of surprises and stress for ALL the homeowners.
Is the income of a condominium association taxable?
The excess of any member assessment income for the year over the association’s deductible operating expenses for member activities is taxable income, subject to the normal corporate tax.
