It’s required by law for HOA’s to keep reserve funds separate from operation funds. In some cases, this can be required more frequently or in larger scope. Associations must also perform quarterly financial reviews and prepare and send out a financial and budget report annually. More associations are using Accounting Software for Community Associations to handle these funds.
Reserve and operating funds
The operating budget of the HOA is normally covered by regular assessment dues, which are recurring payments periodically set by the homeowner association and that must be enough to cover the operating budget. Same as the operating budget guidelines, it’s normally legal for an HOA board to set the association dues without having the owners vote on them unless they are non-emergency increases of 20% or more.
It’s important to keep in mind that reserve funds are limited to use for maintenance, repair, replacements, or restorations on property that HOA is required to upkeep or is related to litigation that involves the items being repaired or replaced. The reserve funds can sometimes be used for operating expenses if they are returned within one year.
It should also be noted that homeowner associations receiving over $100 in income from places other than from owner fees and assessments must pay state and federal income tax, and only if the income totals the $100 after the offset of the expenses made from generating it. For more associations, interest on funds is the only non-assessment related income they have. Most associations avoid the income tax requirement on this income by carrying forward the income that’s potentially taxable to next year’s budget.
These and other accounting tasks are the responsibility of the HOA; however, the association may authorize a professional or committee to manage the responsibilities as long as the association board has the final authority over the procedures. Accounting Software for HOA management may also be used to manage the financial responsibilities of the association and make handling finances less of a hassle.
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