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Is a Condominium Association Board forced to return Surplus Funds at year end?

September 5, 2017

Andrew Cuevas

Cuevas, Garcia & Torres, P.A.

Vantage property title company

Andrew Cuevas, Esq. – President
e-mail: acuevas@cuevaslaw.com

Telephone: (305) 461-9500
Facsimile: (786) 362-7172

Introduction

Mr. Andrew Cuevas, Esq., is the President of Cuevas, Garcia & Torres, P.A., and Vantage Property Title Company. Cuevas, Garcia & Torres, P.A., provides legal services in the areas of Community Association Law, Corporate Law, Real Estate law, and Business Immigration, including title insurance services through Vantage Property Title Company. If you have any questions regarding this article or any other questions, you may contact Mr. Cuevas at (305) 461-9500 or via e-mail at acuevas@cuevaslaw.com. If you are interested in reading previous newsletters, please visit www.cuevaslaw.com, select the icon for Newsletters, and then choose the area of law you are interested in.

Is a Condominium Association Board forced to return Surplus Funds at year end?

Once in a while an Association will operate at a surplus either because there are less delinquent accounts, operating expenses were less than what was actually projected in the budget, or the Association is the beneficiary of an unexpected payout. I have one association client which received over $300,000 in an unexpected payout resulting from cable television servicing contract. The question presented was whether the Association is forced to return any year end surplus to the owners, and if not forced to, should it do so anyway? The two issues to be addressed is the procedural issue of keeping the funds (not returning to unit owners) and the tax impact resulting from the procedures utilized.

It is clear that surplus funds belong to the unit owners. The majority of governing covenants for condominium associations have language similar to the following:

"Common Surplus is owned by Unit Owners in the same shares as their ownership interest in the Common Elements."

The Florida Condominium Act has almost identical language. However this does not necessarily mean that surplus funds necessarily have to be returned to unit owners on a yearly basis.

1) Is the Board forced to return surplus funds to unit owners?

The answer is no, unless specifically required by the association's governing documents.The budget for an association is solely an estimate and an association can have a deficit or a surplus at year end. There is nothing in the statute which requires an association to return excess funds to the unit owners. Use of the funds is within the business judgment of the Board. In fact, many accountants who provide services on a regular basis for community associations regularly recommend that their association client apply the funds to either reserves or contingency funds.

2) What happens if the Board elects to rollover surplus funds instead of seeking a unit owners vote on the issue?

This is where it gets more complicated. If the board elects to rollover surplus funds without a unit owner vote, there could be tax consequences. In order to avoid adverse tax consequences, the Board should consider conducting a vote to apply surplus funds in the operating budgets at the end of the current fiscal year to the budgets for the next fiscal year. The two common tax return filing options for associations are form 1120 (the "Corporate Tax Return"), and form 1120-H, which is used to take advantage of certain tax benefits that allows the association to exclude certain income (membership dues, fees, or assessments) from the gross, taxable income.

If the Association files an 1120 tax return, the Association will be taxed on the excess funds in its operating account unless it holds a membership vote to either roll over the surplus funds to the following year or return the excess funds as a rebate to the members. If the Board wants to hold onto the surplus funds without a unit owner vote, then the Association's accountant should inform the Board of the potential tax impact and which forms should be filed at year end to limit or avoid the tax.

This article is solely a partial explanation of all the issues related to the topic of this newsletter, and is not to be considered legal advice. Associations should seek legal advice for all issues related to this article. This Newsletter is for informational purposes only and should not be relied upon as a legal opinion.

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