Some Topical Updates on HOA Issues

March 16, 2012

By Curtis G. Kimble.

On our Facebook page, we share information, articles, links, and developments in condo and HOA issues, in addition to our more detailed posts on this blog.  For those of you who don’t subscribe to our Facebook page, I thought I’d pass on some recent links and news we’ve shared recently:

  • Condo Association Settles Lawsuit with Veteran over Service Dog  By Erin Alberty | The Salt Lake Tribune

“A Park City condo association will pay $20,000 to a disabled veteran, ending a legal conflict over whether the man should be forced to pay fees to keep a service dog that helps him cope with depression and anxiety.

The U.S. Justice Department sued the Fox Point at Redstone condo association and its management company in November, alleging that Thomas Burton, a combat veteran of the first Gulf War, was forced to move out of his rented condo because the association would not waive its pet fees and insurance requirements for Burton’s service dog . . .”   Read more here

  • Who Prepares Your Association’s Tax Return?   by Lisa Magill, Florida Condo and HOA Law Blog

“A Las Vegas HOA is currently fighting with the IRS over the question of whether $2 million held in the HOA’s savings account is subject to income tax at the rate of 30%.

Associations are generally organized as not-for-profit corporations (some older associations are not incorporated) and therefore must file tax returns like other not-for-profit corporations. Associations are not entitled to tax exempt status like charitable organizations. To be tax-exempt under section 501(c)(3) of the Internal Revenue Code, an organization must be organized and operated exclusively for exempt purposes set forth in the Code. To be tax exempt under IRC 501(c)(4), a homeowners’ association must operate for the benefit of the general public, i.e., it must provide a community benefit – not a benefit to the owners or residents . . .”  Read more here

  • Although written in Virginia, the same principles apply in Utah:  Is It Time for Your Community Association to Audit Its Governing Documents?  By Susan Bradford Tarley.

“Many communities were established 20-40 years ago with governing documents that worked well for the developer, and for the most part the community association. However, many of these governing documents are outdated. Virginia and federal laws pertaining to community associations have changed substantially. If your board of directors has not engaged in an audit of your communities governing documents in the past 5-7 years, it should.

When should documents be amended?  Although there are many reasons for amending documents, these 7 reasons are the most common: . . .”   Read more here

If you would like to see more information, links and updates on condo and HOA issues in addition to the posts on this blog, be sure to like us on Facebook and you’ll see our Facebook posts in your Facebook feed.  A direct link is on the right of this page, or our page can be found here Richards, Kimble & Winn on Facebook

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When the Taxman Cometh, Will You be Prepared?

August 5, 2011

Today, a couple of great presenters spoke to those of us at the HOA Luncheon which is put on by the Utah Chapter of Community Associations Institute each month at the Cottonwood Country Club (these are not exclusive events, all are invited).  Chuck Balacy of Mutual of Omaha Bank / Community Association Banc, and TD Croshaw of Huber, Erickson & Bowman (HEB) presented some good information.  Chuck talked about reserve investment options, maximizing interest rates and HOA loans.  TD talked about HOA tax filing options and options to lower HOA taxes.

The high points were:

Reserve Investment Options and HOA Loans:  1.  Bank loans are a good option for obtaining funding for an association in certain circumstances and the bank doesn’t even lien the property; the bank’s security is the future assessment payments received from the owners.  2.  However, always use a bank specializing in HOA loans, as it is a unique area of lending.  3.  A good bank with an HOA focus will have a representative (such as Chuck Balacy) come out to a board meeting and discuss investment and banking options at no charge so the board can maximize the return on their investment of reserves with the absolute minimum of risk (we’re not talking about investing in technology company IPOs or even the stock market in general).

Taxes:  1.  HOAs can choose to file under either Section 528 or Section 277 of the tax code, with potentially very different ramifications.

2.  Section 528 was set up specifically for HOAs and Form 1120H is a simple one page form and all income is taxed at a flat 32%.  The HOA must meet the 60% exempt function revenue test, the 90% exempt function expense test, and 85% of the sq footage of all the units must be for residential use.   Taxable income is calculated from “nonexempt function income.”  All “exempt function income” is non-taxable. Under 528, HOAs are not entitled to net operating loss deductions and there is a possibility of more income being taxed compared to electing 277.

3.  Under Section 277, the HOA is taxed like a regular corporation and Form 1120 is more complex and has a tiered tax rate.  Additionally, compliance risks are much higher.  Risks include reserves being taxed, excess member income being taxed, and prepaids are income in the year paid and therefore contribute to the excess member income.  Taxable income is calculated from nonmember income, all member income is considered non-taxable.

4.  Neither method is a “one size fits all” and the best option may change from year to year.  A good HOA specialist tax accountant, like HEB, will compute the taxable income under both options and consider the risks versus the value of filing under each option to ensure the HOA pays the least amount of taxes while avoiding the risk of audit, penalties and back taxes.

5.  Are HOAs audited by the IRS?  Yes.  I don’t have any official figures, but TD Croshaw of HEB has personally seen three HOA audits recently.

(This is not an advertisement or endorsement for HEB or Mutual of Omaha Bank, my only intent is to provide simple, straightforward value to HOA boards, and that includes pointing out specialists in given areas from time to time without bias).

Curtis G. Kimble


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