Using reserve money

What reserve money actually pays for

Reserve dollars exist for the big, infrequent items on the association's reserve study: a full roof replacement, repaving the parking lot, resurfacing the pool, replacing the elevator motor. The operating fund covers everything that repeats: landscaping, insurance, management fees, utilities, and routine maintenance [S12]. Keep the two buckets separate before you touch either one.

The reserve study is what tells the board which components qualify and when the money will be needed. It combines a physical inspection of what the association is obligated to maintain with a financial plan, so repair and replacement projects can happen without leaning on emergency funding sources when the time comes [S1]. If an expense is not on that component list, it is an operating question, not a reserve one.

Moving reserve money for a short-term cash problem

Sometimes the operating fund runs short before the next assessment cycle catches up: a big insurance premium lands early, a vendor wants payment faster than expected. In California, the board can move reserve money into operating to cover this, but only after clearing specific conditions. Check your own state's statute and governing documents, since the rule is not the same everywhere.

"authorize the temporary transfer of moneys from a reserve fund to the association's general operating fund to meet short-term cashflow requirements"

Source: California Civil Code Section 5515, California Legislature

That notice has to say why the transfer is needed, lay out some options for repaying it, and state whether a special assessment might be considered instead [S3]. The money generally has to go back to reserves within a year, unless the board gives that same notice again and documents, in writing, why a delay is actually in the association's best interest [S3].

Two shortcuts that don't hold up

A board sometimes hears that this year's surplus operating income can be rolled into reserves tax-free under Revenue Ruling 70-604. It cannot. The ruling gives an association two choices for excess assessment income: refund it to members, or carry it forward to next year's budget [S13].

"an inappropriate practice not intended by Revenue Ruling 70-604"

Source: HOA Excess Revenue and IRS Ruling 70-604 Explained, CBM

The other shortcut is spending reserve money, or skipping a reserve contribution, without writing down why. A board that assesses below its own reserve study's recommendation can face a real legal challenge to that call, according to one community association law firm's analysis of board fiduciary duty [S4]. Documenting the reasoning is what separates a defensible judgment call from a guess.