An HOA’s governing board will assess the cost of a needed repair or replacement and then divvy that cost up among residents. Some HOAs require all residents to pay an equal share, while others base the portion a resident pays on the square footage of their unit. In this article, we’ll explore all the ins and outs of HOA reserve funds and reserve fund accounting practices for community association managers. In other words, the reserve fund is money that the HOA sets aside and uses as a savings account to cover major expenses that may arise in the future. A common choice is to transfer any surplus to the association’s reserve funds. Some community associations may already have a policy in place that directs surplus to the reserve fund.
Owners may reach the end of the item’s lifespan without having the proper funds available to repair or replace it. Now income is recorded, and any reserves are isolated on the balance sheet as they should be. The dues you collect are income, all of them for that period, and they are deposited in a bank account. If you know the amount when you deposit the funds, you can assign the Reserve equity account to the deposit. If they were recorded as something else when deposited, they can be moved with a journal entry.
Can HOAs Invest the Reserve Fund Money?
When your associations find themselves in this situation (which is always better than the alternative!), it’s important to proceed in compliance with the law and in the best interest of your community. With more than 20 years of association banking experience, Marc Nuzzolo is a recognized leader in the banking industry. His career at Valley began in 2016 and, since then, he has been influential in on-boarding and servicing some of the largest management companies in Florida. He continues to grow the portfolio, implement products and services dedicated to this business line, and drive technological change in this industry. In terms of revenues, the association records them when it earns them, not when it receives them.
Additionally, this state allows HOAs to borrow against the reserve fund if it helps shore up the community’s income as long as they pay the money within a year. HOAs must always follow the state regulations for reserve funds whenever they create, modify, or spend one. Also, most of the time, both the raised dues and the special assessments are inefficient, as they only show the consequences of the HOA’s lack of planning.
How to Account for the Sale of Inherited Property to the IRS
So, for example, an association might require the board to hold in reserve at least 75% of anticipated expenses at any given time, adjusted based on the schedule for deferred maintenance. Although reserve funds are often not mandatory, an ample reserve can play a big role in protecting a community’s long-term financial health. The reserve funds must be kept in a separate bank account from the operating funds. If they are not, the IRS can look at them as taxable income to the community.
- The cash basis accounting method does not include Assessments Receivable or Prepaid Assessments accounts on the Balance Sheet.
- On our Balance Sheet our bookkeeper lists Dues and Reserves as Income.
- Others budget for the renovation or repair of property items rather than complete replacement to keep costs down.
- Karyan San Martano is an attorney in the firm’s community association practice.
- The problem we are having is the reserve funds, four of them, are not actually in a separate bank account.
If unpaid invoices appear under Accounts Payable, the amounts will differ from those recorded on the Balance Sheet. This is because the recording of expenses follows the cash basis and not the accrual basis. Some states require associations to maintain a reserve fund by law. Most of the mortgage loans on condos are underwritten by the Federal Housing Administration. The FHA requires that a minimum of 10% of the association’s budget be designated for the reserves.
What Your Reserve Fund Must Do
However, all reserve fund spending must also stick to community bylaws and regulations. In addition, California allows HOAs to borrow against their reserve fund to help shore up their income. hoa reserve accounting journal entry The only catch is they must pay back what they borrowed within a year. Whatever an HOA chooses, the goal should be to keep clear, accurate accounting records of every transaction.
- It is important to maintain transparency of any transfers between funds by recording the activity in each fund and presenting the transfers on the face of financial statements.
- However, you can think of reserve funds as the money you save to pay for major repairs when there’s unexpected damage, such as fixing a plumbing leak, for example.
- Let’s say, for example, a passing storm knocks a sizable tree onto the roof of an apartment building.
- Arizona requires property damage coverage for at least 80% of the value of common elements and liability insurance with coverage limits decided by the board.
- Therefore, board owners or community association managers should plan ahead and include future repair and replacement costs automatically in periodic dues.