After April 15 (the infamous tax day), most people generally stop worrying about taxes. However, if you reside in and/or serve on the Board of Directors of a condominium, townhome or homeowners association, the tax process is just beginning. The tax man, it seems, is not bound to any particular calendar.
There are generally three types of taxes that are of concern, directly or indirectly, to an association’s Board of Directors. The first tax concern is income tax. It is a common belief that Associations, as not-for-profit corporations, are not required to file a tax return. This is inaccurate. Even though most Associations are not-for-profit, the Board of Directors must file a tax return on behalf of the Association. Fortunately, unless the Association has large interest income, the Association generally does not have to pay taxes. The reason being is that the money collected from assessments is offset by the maintenance costs for the property. If there should be any excess, the Board with the consent of the homeowners may adopt a resolution which transfers the excess funds into a reserve account, and, as such, these funds are not taxed. If you need a copy of this resolution, please contact us and we can provide you with the form.
The other taxes that have a direct and indirect consequence to a community association and its Board of Directors are property taxes. Property taxes apply to individual residential units as well as common areas of the property.
As you are aware, every unit owner in the Association should receive a tax bill for their property. If the owners believe that the taxes are too high, the Board of a Condominium Association has the right to appeal the taxes on behalf of all owners. If you are on the Board of a Townhome or Homeowners Association, your Declaration may set forth the Board’s right to file a tax appeal on behalf of all homeowners. Most attorneys who concentrate on condominium, townhome and homeowner association law can file an appeal. This is done on a contingent fee basis. As such, if there is no reduction to the Association members, the attorney does not receive a fee. If there is a reduction, the Board may pay the fee out of the common expenses or charge the cost back to the owners, depending on each owner’s tax savings.
In addition to taxes on units, there may be taxes related to the common property of the Association — hallways, clubhouses, swimming pools, parking garages, etc. Generally, the common areas are assessed for property taxes at no more than $1.00 per year. This is based on the Illinois Revenue Act which states that real property used as common area or areas where the beneficial use and enjoyment is reserved for the unit owners residing in the Association shall be taxed at $1.00. The theory behind this statute is that the owners are paying taxes on the units. The value of the unit includes the common areas. As such, if the common areas were also taxed, it would essentially amount to double taxation.
Even though the statute is clear, it is surprising how many Associations receive a separate tax bill and pay an additional tax on the common areas in the Association. We recommend that all Board members who do receive a common area tax bill on behalf of the Association make certain that the tax bill shows an assessment of $1.00 or less. If it does not, an appeal should be filed with your County’s Tax Assessor’s Office immediately to reduce the common area tax bill to $1.00.
Taxes can be a complicated issue for an Association. As such, if Board members do have questions, they should consult with the Association’s manager, attorney or accountant.
Originally published in the Pioneer Press (July 2000).