Using Reserve Fund Dollars for Operations

11 Aug 2025 Using Reserve Fund Dollars for Operations

Authored By: John Boekweg, CPA

Purpose of Reserve Funds in HOAs

One of the principal objectives of an HOA is to preserve the HOA’s common property.  In order to accomplish this objective, many HOAs accumulate funds for future major repairs and replacements in a Reserve Fund so that as major repair and replacement expenditures are incurred over time, there are sufficient funds available to cover those costs.  For tax purposes, these funds are not includable in the HOA’s taxable income; rather, they are treated as capital contributions.

Using Reserve Funds for Operating Expenses

 Occasionally, an HOA may experience financial pressures and elect to dip into its reserve funds in order to pay some operating expenses.  Doing this is rarely advisable as it often creates problems with the HOAs strategic long-term reserve funding goals. However, if an HOA decides to do this, it is important that the HOA carefully consider the tax implications.

Tax Implications Based on IRS Filing Status

 If an HOA files its tax return as a homeowner association under Internal Revenue Code  (IRC) section 528, it can move reserve funds to the operating fund without tax consequences as long as the transaction complies with the HOA’s governing documents and has been approved by the HOA’s board of directors.   However, if the HOA files as a regular corporation under IRC section 277, the HOA’s reserves will become tainted and may create taxable income.

Mitigating Tax Consequences for IRC Section 277 HOAs

One way an HOA that files under IRC section 277 can move money from the reserve fund to the operating fund and avoid taxable income is to adjust the allocation of future assessments between operating and reserve so as to increase the operating fund portion and decrease the reserve fund portion leaving the total assessment amount unchanged.  This would only work, however, if the HOA has a net operating loss carry-forward that can absorb the increase in the operating fund.  Otherwise, the HOA will have the same tax problem that it started with.

Seek Professional Tax Guidance Seek Professional Tax Guidance

It is advisable that an HOA’s board seek guidance from its tax professional before dipping into reserve fund dollars to pay operating expenses. Contact the HOA experts at Haynie to ensure compliance and avoid unexpected tax consequences. Our team is ready to help you navigate these complex issues and protect your HOA’s financial health.