Even with their many expenses, an HOA board may reach the end of the year and discover they have an operating funds surplus. This occurs when all revenue or receipts, which may include rents, assessments, or profits obtained by the association, exceed the common expenses.

While being in a positive financial position is encouraging, some boards may wonder what is to be done with any surplus funds. Do they carry the funds forward to the next year, transfer them into a reserve account, or return the money to homeowners?

Know the Law

While boards are tasked with the job of determining what is to be done with common surplus, often state law can make the decision easy. For example, Colorado law requires that unless the declaration states otherwise, surplus funds must be returned to unit owners or otherwise credited to them to offset future recurring assessments. Alternatively, the Florida Condominium Act does not specifically state what associations are required to do with an operating funds surplus, and it doesn’t require that HOAs return the common excess to the unit owners.

Because laws vary by state, is best to consult with your association’s legal counsel to determine how your particular association should handle surplus funds.

Non-Profit Status

What effect, if any, does having excess operating funds have on an association’s nonprofit status? HOAs differ from charitable corporations in that they are formed for the owners’ mutual benefit. They are also subject to certain tax privileges, but not the exemptions afforded to other nonprofits. Excess funds are not taxable and shouldn’t affect an HOA’s nonprofit status, although the HOA may be required to pay a higher tax rate on taxable interest income.

Member Refunds

In certain circumstances, a board may choose to refund the common surplus to the association members in the form of payment or credit for the coming year’s budget or assessments. This route is uncommon and not recommended because of the possibility that the board may have to levy a special assessment if actual expenses for the following year exceed projected expenses.

 

When faced with determining how to handle excess funds, boards should carefully consider their association’s financial position. Spectrum Association Management can help ensure that the best decisions are made for the continued financial success of your community. Contact us today to get started!