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Death, Taxes, and HOA Dues

Posted by Chris Kelsey on Apr 18, 2018 8:18:00 AM

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Death Tax HOA DuesEveryone is familiar with the saying “nothing is certain but death and taxes”, but it seems we can add HOA dues to the list of inevitabilities as the country continues to go the way of the HOA. I personally like HOAs, partly because their existence keeps me employed, but also because living in one offers the peace of mind that my neighbor can’t adhere a giant Hello Kitty decal to their garage door! Since it’s tax day and millions of Americans are scrambling to file their returns, I thought it might be interesting to explore how taxes and HOAs might relate to one another:

HOAs have to file taxes too:
HOAs are typically non-profits, but even if an association is created as a non-profit in a given state, the IRS considers it a corporation and it is therefore required to file either Form 1120 or Form 1120-H (if it has made a special election and meets requirements related to “exempt-function” and “non-exempt” income). Just like individuals and other corporations, an HOA could be penalized for late filing of its return. Some HOAs generate revenues from homeowners outside of standard dues and assessments and these “non-exempt” revenues are subject to state and federal income taxes.

HOA dues are like community taxes:
Like it or not, HOAs are here to stay. I think one big reason for the growing popularity of the HOA model is that cities can farm out some municipal functions to HOAs. For example, my HOA maintains two of the four streets in the neighborhood as private property and the Board of Directors conducts periodic walkthroughs of the community to enforce the rules laid out in the governing documents. In both instances, the HOA is engaging in infrastructure and administrative projects that would otherwise be left to the city. With HOAs performing municipal functions, it really isn’t a stretch to liken HOA dues to taxes. You are assessed dues by the association, for the benefit of the community at large, you have representation in association governance by the election of Board Members, and you have protections hedged in legally-binding governing documents; HOAs are mini municipalities.

Can’t avoid dues or taxes:
Just as you can’t avoid paying taxes without being hit with penalties, you can’t miss a payment or two to the HOA and avoid late fees and interest. The ink has long dried on legislation drafted in state chambers across the country, codifying legal remedies for the collection of delinquent assessments. Don’t call the IRS’s or HOA’s bluff…they aren’t bluffing! The longer you avoid payment, the more expensive things become as penalties and attorney fees rack up. Most states allow for wage and bank garnishments and foreclosure actions to recover debts owed to the HOA. In Arizona, the legislature is moving to decrease both the minimum principal balance of debt and minimum number of unpaid months to initiate foreclosure by the association by HALF! Not only are you likely to face severe consequences for stiffing the HOA, these consequences are becoming more swift.

Stuff happens:
Sometimes you don’t have enough withheld from your paychecks or you fail to make quarterly payments for your business; sometimes you forget to pay your HOA dues, or sometimes you just don’t have the money. With taxes and dues, mistakes and setbacks can happen, but whether you owe the IRS or the HOA, both entities are willing to work with you. If you can’t make on-time payment, it’s best to set up a payment plan. While IRS payment plans are rigid templates, HOA Boards have much more discretion to waive interest and late fees for homeowners earnestly working to bring their accounts current. No one wants to punish the struggling family on the block and the HOA isn’t looking to manage a portfolio of homes acquired in foreclosure sales. Talk to the Board and come up with a plan that will keep the community funded and save you in additional fees and costs of collection.

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Topics: taxes, HOA Collections

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