Every homeowners’ association needs to have reserve funds set aside to help properly maintain the community and its facilities. Reserve funds are kept for major improvements to the association as needs arise over time. Community components such as pools, roofing, driveways, parking lots, and playgrounds will all eventually require renovation or replacement.


Reserve Fund vs. Operating Fund

While reserve funds accumulate over time to cover the costs associated with major projects, operating funds are used for day-to-day maintenance expenses and regular services such as lawn care, snow removal, and security.

Besides these differences of purpose, it’s important that reserve and operating funds are kept in separate accounts as part of reserve fund accounting.

Reserve Fund Accounting

If all fees collected from HOA members are kept in one checking account, the board will need to move money that is allocated for reserves into its own separate account where the reserve funds are kept on deposit. This is called reserve fund accounting. In a separate bank account, the IRS does not view reserve funds as taxable income to the community.

Reserve Spending Options

So they don’t inflate net income, and since reserves directly contribute to capital, they must be removed from the income/expense statement.

Boards should charge reserve expenses directly against the reserve fund balance. When reserve funds are spent upon approval from the board, that money should be moved from the account back to the checking account in order to pay the bill. It’s important to not charge the check against the reserve savings account from which the money has been moved.


Understanding reserve fund accounting is just one of many responsibilities given to HOA boards as they fulfill their roles in leading the community. An HOA manager can be invaluable in ensuring that association funds are handled correctly.