Unit bought, sold, bought: Who owes the fees?

Q: We have a unit where the owner walked away about eight months ago. The unit was recently sold to a new buyer. That buyer fixed up the interior and resold the unit about a month ago. The latest buyer is not living there, but has other people in the home, which is a violation of the community rules.

The management company stated that we cannot send a violation letter because the unit is still in collections from the original owners. Is this correct?

A: You should have already received the delinquent funds when the first buyer purchased the property. You need to contact the collection company that was involved to find out what happened to your assessments.

As to the violation letter, if the current owner is the owner of record (you can check with the Clark County's Recorders Office), then send him or her the violation letter.

The two issues should be separate and distinct unless there is more information that you have not been informed from the management company.

As to your violation, I have yet to see a covenant that stated that only the owners can live in the unit. You need to check that out with legal counsel.

Q: Where should depreciation or "accruals" be listed in a homeowners' association's books. The end-of-calendar-year audit by our accountant showed a tremendous loss, despite the fact that all year long the financial committee operating budget was reported at our monthly meetings as being on target and in the black.

I have been told it is OK to list it in the operating budget per state rules. In business accounting you can offset depreciation by income thus reducing the depreciating loss. However, how does a 501 (nonprofit) balance out at the end-of-year audit without raising assessments to offset this perennial drain?

A: I took your questions to William P. McCarthy, certified public accountant, here is the his response:

Generally, depreciation expense is recorded on capital assets. Therefore, an HOA may spend $50,000 this year on furniture and equipment while only deducting $10,000 in depreciation expense during the current year. In subsequent years the HOA would record depreciation expense of $10,000 each year until the full cost of the asset has been expensed ($10,000 times five years).

HOA boards prepare their budgets on the cash basis, i.e., how much money is going out the door in the current year. Therefore, in the year of acquisition the board budgeted $50,000 in expense but the audited financials capitalized that cost and only recorded $10,000 of depreciation expense, a difference of $40,000.

For the next four years, the board budgets zero expense but the audited financials report $10,000 of depreciation expense each year. At the end of the five years you are square: You paid $50,000 for the equipment and have deducted $50,000 on the books.

Homeowners' associations are a different breed as there are many items that are assets to the association that are not recorded on the books for reasons pertaining to generally accepted accounting principles that are too involved to discuss here.

As an example, if an office partnership were to repave the parking lot, we would capitalize and depreciate the cost. When an HOA repaves the private streets, we typically expense the costs as incurred. The primary reason is the association does not have all elements of ownership that private ventures do. They cannot sell the common areas of the association, they are simply charged with maintaining those assets for the association members.

When you say your community was told that it was "in the black" internally and then have a "substantial" loss shown by the audit report, that is surprising.

All I can think of that items like the street repaving was capitalized for this association, or I have also seen instances where I the association recorded the value of the common area (clubhouse, streets, etc) contributed by the developer as an asset, and they depreciate those balances. That could possibly account for your situation.

Finally, you mention increasing dues to offset the "loss" generated by the depreciation deduction. That is not required. A "profit" is not really required on an annual basis. The board simply needs to fund current operations and the reserves. I do not know what you means by "how does a 501 balance out," likely referring to IRS code section 501 for nonprofits. HOAs are not nonprofits in the eyes of the IRS, even though they may have organized as such with the state. This is a general misconception. Associations do not meet the IRS requirements.

Barbara Holland, certified property manager, is president and owner of H&L Realty and Management Co. To ask her a question, email support@hlrealty.com.