HOA can foreclose on homes; rent them
Q: I am on our homeowners association board and have become frustrated with homes sitting empty and the banks not foreclosing on them. We have some the homeowner walked away from more than four years ago and they just sit there. Is there an easy way to find out who actually has the mortgage and to force them to take action?
A: If you want action, start the foreclosures. The banks know that if they do not respond they could possibly lose their interest (loan) on the home with the association owning the home, free and clear.
Q: I have a follow-up question about your column of March 1. Although a HOA-foreclosed home can be rented we have been told that we can only rent it for the total owed. Let’s say the foreclosed home’s debt was $14,000. That means we can receive only that amount in total rent or purchase price.
I would like to sell this house pursuant to a favorable ruling from the Supreme Court at market value to offset costs.
A: There is nothing in the state tax law that limits the amount of rent income the association can receive. The difference in this case is that the rent income is not “exempt’” income to the association. Although homeowners associations may have incorporated with the Nevada as a nonprofit organization, they are not classified as nonprofit organizations for purposes of filing taxes with the Internal Revenue Service. Homeowners associations have the option for filing as a regular corporation via Form 1120 or as a homeowners association filing Form 1120-H. Without getting into too much detail, most associations file Form 1120-H, which taxes “nonexempt” net income at 30 percent. Typically, this is interest earned on reserves.
However, any other income earned by the association outside its purpose of managing the common areas is also considered nonexempt income. Therefore, regular dues, special assessments and late fees are not taxed. Nonexempt income, such as interest income, rental of a clubhouse facility or rental of a foreclosed home, is subject to taxation. The rationale is that the association is competing in the residential rental market and the competition has to pay tax on net profits, therefore the homeowners associations must as well. The association would need to track expenses directly related to the operation of the rental property to arrive at the net income earned on the rental. If the association realizes a gain upon the sale of the home, the gain also would be subject to taxation.
Barbara Holland, certified property manager, broker and supervisory certified association manager, is president and owner of H&L Realty and Management Co. Questions may be sent to the Association Q&A, P.O. Box 7440, Las Vegas, Nev., 89125. Fax is 702-385-3759, email is support@hlrealty.com.