Question: I've read that we only owe taxes on our reserve interest income, but according to the IRS form for a homeowner's association, we should also include any excess assessment income over expenses that is added to reserves. Our expenditures are quite variable from year to year, with some years seeing significant additions to reserves and other years draw-downs.

Answer: Typically, an HOA does not have "excess assessment income". Excess funds after all operating expenses are paid are, or should be, designated for Reserves. The problem is that many HOA budgets do not actually plan for reserves or include it in the budget. Reserves only happen by sheer luck, when there is money left over, and when does that ever happen? So from the IRS's definition, if reserves aren't planned, money left over could be considered "excess assessment income" and taxable.

Reserves should not be funded by "what's left over" at the end of the year. Proper reserve planning requires a Reserve Study that outlines a long range (typically 30 year) maintenance schedule and funding plan that systematically sets money aside for repairs like painting, roofing, etc. This should be performed by a knowledgeable Reserve Analysis.

The IRS also requires that reserve funds be held in a separate bank account apart from operating funds. If funds are being accumulated exclusively for capital repairs and replacements, no taxes are owed on the funds themselves although the interest earned is taxable. If an HOA has any significant reserves, a knowledgeable CPA should assist in filing the proper form (1120 or 1120H).

Question: We are publishing an HOA directory containing the names, addresses and phone numbers of all residents. Are we required to contact each homeowner and ask their permission to publish their information?

Answer: Inclusion in such a list should be voluntary and each resident should provide specific written authorization. The association should respect all desires for privacy. Distribution of the list should be specifically limited to other residents to avoid unsolicited bombardment from area vendors.

Question: Our HOA charges an Initiation Fee to all newcomers. Is this appropriate?

Answer: Depends. Sometimes there is a requirement in the governing documents for all new owners to make a "contribution to working capital". I've seen dollar amounts up to two months worth of regular assessments. However, there may also be a practical reason for a Move In/Move Out Fee when there are related costs incurred by the HOA.

This is particularly true in a secure building or gated community where access and elevators must be scheduled, reprogramming done to the entry access system and clean up after the movers. The fee should be commensurate with the actual cost, not a mechanism to make money. Gouging newcomers is not good way to begin a relationship. And never make the mistake of charging renters only. If a Move In/Move Out Fee is justifiable, all that qualify should pay it.

Question: I live in a condominium with seven different unit sizes. There are five large units with two parking spaces each. All the other units are 50% smaller and have only one parking space each. We all pay the same monthly fees. Is this legal? Can this be changed?

Answer: Usually, if there are significant differences in unit square footage and number of parking spaces, the fees are usually allocated based on a percentage proration. For example, if a unit had 2000 square feet plus 400 square feet of parking space out of a total 100,000 square feet, it would pay 2.4% of the total annual fees (2000 + 400 = 2400 divided by 100,000 = 2.4%). Another unit having 1000 square feet plus 200 square feet of parking would pay 1.2% of the total annual fees or half as much as the larger unit.

However, in your case, this is probably all moot. If the governing documents divide all fees equally, regardless of unit size or parking, that's the way it is, fair or not. You agreed to it when you bought the unit. Changing it to a "fair" split probably requires 100% agreement of all owners. While theoretically possible, it's highly unlikely to happen.

For more Ask the HOA Expert, see www.Regenesis.net

Published: November 20, 2002

Use of this article without permission is a violation of federal copyright laws.

Richard Thompson owns Regenesis, a management consulting company that specializes in condominium and homeowner associations. He is a nationally recognized expert on HOA management issues. Regenesis publishes The Regenesis Report, a monthly newsletter for HOA boards, developers and managers. To subscribe, go to Regenesis.net. He can be contacted by email at .