ldmom06

(Up front, I'm embarrassed I don't know the answer to this, but hey I'm an auditor-type CPA, not a tax person.)

Here's the question posed to me tonight by my husband. He is president of our HOA Board, and we currently have a homeowner who is in financial difficulty and who is short-selling their home. The HOA is a junior lien holder due to unpaid annual dues, late penalties and attorney fees. As part of the short sale negotiations, the Board agreed to a 50% reduction in the amounts owed the HOA. This was demanded by the bank as a condition of approving the short sale. Because these homeowners own another home which is their primary residence, I do think they will be 1099'd by the bank for the amount of debt forgiven on this loan. The question is....is the HOA also required to issue a 1099 for the amount of dues/penalties/fees forgiven by the HOA?

Okay...CC attorneys, accountants, realtors, bankers....help me out here.

(Next thread will be on the irony of my husband and I using our overseas phone call minutes to discuss tax implications to the HOA...when we haven't seen each other in two weeks. )

ellemenope

I would look at the rules of who must file a 1099C when there is debt forgiveness. It looks like the ones who have to file are entities who have a significant trade or business of lending money (banks, credit unions, credit card companies) and fed agencies, etc. Not sure that an HOA qualifies.

But not a tax lawyer or tax accountant...just read the instructions to the form.

patsmom

ldmom,

I don't know the answer, but the newsgroup misc.taxes.moderated is an excellent place to get answer to questions like yours. There are a lot of CPAs and enrolled agents who monitor the newsgroup and are happy to jump in and help out.

If you don't find an answer here on CC, you might just try them. If you need help with using newsgroups, PM me and I'll try to help.

JHS

I think ellemenope is right. In addition, I am reasonably certain that cancellation of homeowners association dues liability is not cancellation of debt income (unless it so happened that the property was held as part of a trade or business by a taxpayer reporting on the accrual method, and some of the unpaid dues had been previously deducted -- which would be pretty unusual).

Are they selling to the bank or directly to a third party, with the bank's approval. If the former, the bank would not issue a 1099C; it would be treated as a sale to the bank for the amount of the mortgage.

xiggi

It is extremely doubtful that there is debt relief for the home owner because of the nature of the obligations, and hence no need to report any "income."

In many cases, because of their special legal situation, HOA are known to engage in bona fide extortion in the form of excessive and usurious late penalties and predatory attorney fees.

American democracy at its best!

Homeowners Associations: News

ldmom06

Thanks for the help and links guys.

More details...the homeowners in question own and reside in another home, have liens with two financial institutions on the home in our neighborhood, and are in extreme financial difficulty. Bad health problems, bad business decisions and the HOA Board is doing their very best not to stick it to them. But, the Board does have a fiduciary obligation to other residents and must file a lien after all attempts to collect or work out a payment plan have been exhausted. (And actually, in Texas, HOAs can force a foreclosure; though our HOA has never done this.) Recouping legal fees related to collection notices and lien filings would be nice since they are an expense to all homeowners, but at this point 50% won't even cover the actual annual dues they have failed to pay.

Regarding the sale question....the short sale will be to a third party. Because they own two homes and won't get any relief from recent mortgage default legislation, I'm fairly certain the two lending institutions will issue 1099s.

This is an altogether sticky situation. We have another homeowner who claims to be in a similar financial situation but who is trying to stay in their home. This person has refused pay to annual assessments for years. I'm sure when he hears of the concession on the short sale home, he will demand similar accommodation. And he may have a legit argument, since the Board is now establishing a precedent of waiving annual fees. Furthermore, I question whether the Board even has a legal right to waive fees to facilitate the short sale. According to the charter, the Board function is to collect annual assessments, not waive them. They are severely limited in their ability to increase the fees, so one has to wonder if they have any authority at all to reduce or waive them.

Also, those with homes on the market in our very small neighborhood may have a claim against the Board for involvement in this short sale, since the effect of the extremely low selling price will be to reduce the comps.... which directly affects the amount of money a lender is willing to risk to future buyers of their homes.

Icky situation. My husband and a couple others voted against accepting the partial payment mainly because of the legal exposure. Also he argued it isn't the HOA's function to facilitate real estate deals or mitigate commission losses to real estate agents or loan losses to banks. (That the seller's agent is the wife of a former Board member adds a little rank odor to the situation.)

But.... they were outvoted. So now it's about making sure the HOA handles the transaction properly, if that is possible.

xiggi

Indeed, Texas' HOA have developed an extremely nasty reputation where dictatorial "elected" officials have extorted fees that are clearly usurious and allowed "brother-in-law" attorneys/ambulance chasers to add punitive legal fees. There is an entire cottage industry of unscrupulous lawyers who has helped the nazi-like HOA reduce their costs by stealing from retired citizens, widows and orphans.

While it is entirely possible that the OP's HOA is very different from the typical HOA and only imposes legitimate and market fees, this would be an exception. For the record, legal fees and late fees of 50% of the total bill are on the low side. It's not unusual to see add-ons of $10.00 per day on monthly bills of $100.00. In one month, a $100.00 could quadruple the bill. Add a lawer, and this $100.00 could become $1,000 overnight.

Let's see how the HOA deals with its friendly legal eagle when the shoe is on the other foot.

Fwiw, it's a mystery why HOA have been allowed to conduct themselves in such a manner in Texas. Even pawn shops have more stringent laws on usury.

Chedva

Does the HOA have legal counsel? Before it goes ahead with all of this, it should! I know it's an additional expense, but it's a lot less expensive than having the other homeowners sue for concessions on the basis of precedent, or for the decrease in their property values.

ldmom06

xiggi makes valid points...I do think HOAs need more guidelines, but I get queasy when the talk turns to limitation of authority.

Consider this....the 'other' homeowner I spoke of has refused to pay annual assessments for years, has peppered the Board with nasty letters and threats of lawsuit, continues to enjoy the amenities and even files complaints if they are not kept in pristine condition. (The latest one was regarding a broken handle on a gas grill in one of the park areas.) He lives in a neighborhood that is considered one of the nicest in this part of Harris County, enjoys the preservation of his home value made possible by those homeowners who DO pay their annual assessments, and somehow has funds to pay all other expenses except annual HOA fees. (He claims he can't because his 'wealth' is tied up in a foreign country.) Because our Board MUST pursue him, legal fees are incurred which again penalize every other homeowner who contributes to the operation of this community. Furthermore, our Board cannot disclose his identity in meeting minutes when his delinquent assessments and related legal actions are discussed. So as he is out there badmouthing the Board for their failure to keep the gas grill handles in working order, those homeowners who are on the receiving end of his diatribes have NO idea they have been subsidizing him for the last 6 or 7 years.

It CAN be argued that too many limitations on HOA authority will only encourage the above behavior.

Ched - Our HOA has an attorney and management company, but neither really inspire confidence. They brought this short sale deal to the Board with the recommendation the HOA take it, but Board has yet to see actual documentation or paperwork related to the concession. A number was thrown out and the Board just took it. (Another reason my husband and a few others said 'no way'.) Sigh...ya get what ya pay for I suppose.

ellemenope

It is to the HOA's advantage to get rid of the deadbeat owner and get someone in there who will pay the dues. If you have to make an accommodation, then so be it.

ldmom06

JHS - I think you are right...from the basic accounting angle, the HOA doesn't use accrual accounting and there really is no 'expense' (expenditure) recorded related to the failure to collect. So, no expense to one party is no income to the other. No income, no 1099. On the other hand, lending institutions will undoubtedly write the unpaid portion of loan off against reserves, so it IS different for the bank(s).

Make sense. Thanks!

ldmom06

elle - one way or another, in the short sale situation, the deadbeat owner is going and a new one is coming. To me, it's just a question of whether there is legal exposure if a Board becomes one of the parties in the transaction.

The other guy...ha! Good luck getting rid of him. He's got the game figured out. He knows our HOA won't foreclose his home and when he finds out about the short sale concession, he'll be asking 'where's mine?'

Erewhon

No need to forclose. Put a lien on his house for past dues plus interest and he'll pay upon sale of the house. It would be behoove him to pay now to avoid accumulated interest. Not to mention, a lien makes a buyer leery. Does he really want the future aggravation and costs?

rhumbob

First, i would ask the CPA who prepares the HOA tax return. I find the professionals working with HOAs and Condo Associations usually have quite a few as clients and may already have the answer.

The easy answer is that you go ahead and issue the 1099. No downside for the HOA. If there is no tax related to the forgiveness of the dues/assessments let the homeowner's tax preparer figure it out and deal with the issue on the homeowner's tax return. Why should the HOA spend time/resources on the issue?

xiggi

To clarify my earlier points, please note that I am not advocating for the ban of HOA's rights to pursue deadbeats and collect legitimate expenses. Obviously, a homeowner who abuses the system by avoiding paying his dues for years on end should not be protected.