An HOA special assessment can come in handy during times of financial crisis. That said, there are certain requirements, procedures, and limitations involved. Board members must understand how special assessments work to ensure compliance and avoid liability.
What is an HOA Special Assessment?
A special assessment is an additional fee that an HOA collects from homeowners on top of their regular dues.
Unlike dues, HOA special assessments are one-time charges. This means that they do not recur, only coming up if the association requires an extra cash injection. The purpose of a special assessment is to pay for unexpected costs that the operating budget, reserve fund, or insurance can’t cover.
Can an HOA Levy Special Assessments?
The answer depends on state laws and the association’s governing documents.
Some state laws explicitly give HOAs and condominiums the authority to levy special assessments. One such example is Virginia. Under Section 55.1-1825 of the Property Owners’ Association Act, an HOA may impose an additional assessment if it serves the association’s best interests and the purpose is primarily for common area maintenance and upkeep.
When state laws are silent, board members must refer to their CC&Rs and bylaws. Even if state laws grant express authority, many governing documents enforce additional requirements or procedures that boards must follow when levying HOA special assessments.
What is an HOA Special Assessment For?
In general, an HOA special assessment is used to cover emergency repairs, budget deficits, capital improvements, or underfunded reserves.
- Emergency Repairs. If insurance doesn’t cover a repair caused by an emergency, such as a natural disaster, a special assessment can step in.
- Budget Deficits. A special assessment can cover shortfalls in the budget caused by unexpected costs or high delinquency rates.
- Capital Improvements. When the HOA needs to fund a large project, such as a renovation, it may turn to special assessments if its current funds are inadequate.
- Underfunded Reserves. Associations can use special assessments to bridge the gap when the reserve account isn’t at a healthy funding level.
While these are common examples, boards must check their governing documents. Some CC&Rs and bylaws limit what associations can use special assessments for.
Is There an HOA Special Assessment Limit?
It depends on state laws and the association’s governing documents. Most states don’t impose a ceiling for special assessments, instead letting associations rely on their CC&Rs and bylaws.
One notable exception is California. Under Civil Code Section 5605, an HOA board can impose a special assessment of up to 5% of the association’s budgeted gross expenses for the current fiscal year without member approval, even if the governing documents set different limits.
Some CC&Rs and bylaws place a percentage limit on special assessments, while others have a strict dollar cap. There are also those that require membership approval when exceeding a certain percentage or amount.
HOA Special Assessment Rules to Know
Requirements and procedures for HOA special assessments can vary from one association to another. It is important to check the governing documents for specific guidance.
Required Vote (Board or Membership)
Many CC&Rs and bylaws require a vote of approval to pass a special assessment, either from the HOA board or the entire membership. Board approval is easier to obtain, as it usually requires only a majority vote of the directors.
Membership approval, on the other hand, is trickier. Most governing documents require a supermajority or a specific voting threshold to approve a special assessment. Since this assessment is an additional charge, boards often struggle to secure the necessary votes, as most owners don’t want to pay another fee.
Still, education is key. If owners understand the purpose of the assessment and how it will benefit the community as a whole, they are more likely to support the proposal.
Of course, there is typically an exception that allows the board to bypass a vote. If the expense addresses an emergency safety or health issue, approval may not be needed.
HOA Special Assessment Notice
Depending on the governing documents, associations must give homeowners formal written notice of the special assessment. This notice must detail the cost of the assessment, the reason for it, and the payment deadline. While timeframes can vary, most CC&Rs and bylaws require 30 to 60 days’ advance notice.
Calculations
In some communities, the special assessment must address a funding cap. This is calculated by subtracting the insurance payouts and available reserve funds from the overall cost of the project.
Cost Allocation
Depending on the CC&Rs and bylaws, the allocation of the assessment follows a specific formula. Most communities split the cost equally among all homeowners. Meanwhile, others allocate the cost based on property size or type.
Payment Terms
Associations often allow owners to pay their assessments either in a lump sum or in installments over several months. It usually depends on the association’s governing documents and the urgency of the need.
Designated Use
Most governing documents require the board to use the special assessment solely for the proposed or communicated purpose. For example, if the board approved the special assessment for a landscaping project, it can’t use the surplus to fund a community event.
How Often Should an HOA Levy a Special Assessment?
A healthy HOA should rarely impose a special assessment on its residents.
Associations are responsible for financial planning and management. This includes projecting operating costs and allocating appropriate reserves based on a reserve study. If the budget doesn’t fall short and the reserves can cover all major projects, then there shouldn’t be a need for HOA special assessments. The key is to make prudent financial decisions.
If an HOA frequently charges additional assessments, it may indicate a bigger problem. The board should investigate the cause and address it at its root. For example, if special assessments are consistently triggered by unexpected repairs, it could be traced back to a lack of preventive maintenance. Similarly, an outdated reserve study with obsolete funding recommendations may result in underfunded reserves.
Is an HOA Special Assessment Tax Deductible?
No, special assessments that an HOA collects are generally not considered taxable income. This means that the association doesn’t pay income tax on these charges.
That said, there is a condition. To remain non-taxable, the association must use the special assessment for exempt functions, such as managing and maintaining HOA-owned property. This includes using the money on repairs or capital improvements.
Treading Carefully
When used correctly, an HOA special assessment can be a practical financial tool. This additional charge can help improve cash flow and keep an association financially solvent. That said, it comes with certain limitations and requirements that can vary from one community to another. Reviewing state laws and governing documents can help ensure compliance.
Westward360 is a trusted partner for HOAs and condo associations across the United States. For expert association management, contact us today or request a proposal online!
