Quick Overview
Every homeowners’ association must maintain accounting records in accordance with the Accounting Act. Responsibility lies with the association’s board or chairperson, even if the accounting is actually handled by an external accountant or property management company. Each year, the HOA must prepare financial statements, submit them to the owners’ meeting for approval, and then file them in the collection of documents. The HOA files a tax return only if it has taxable income. The most common errors arise when distinguishing between the HOA’s income and that of the owners, when failing to collect debts, and when improperly allocating costs for building management and services.
Are you dealing with uncertainties in your HOA regarding accounting, financial statements, owners’ debts, or the board’s responsibilities? Our attorneys can help you review the board’s procedures, prepare materials for the owners’ meeting, or resolve disputes among owners before they escalate into litigation.
The obligation to maintain accounting records falls under the authority of the statutory body. As a nonprofit organization, an HOA maintains accounting records that differ somewhat from those of ordinary businesses and has a customized chart of accounts that also differs from the chart of accounts used by businesses. The HOA committee does not have to perform the bookkeeping itself; rather, it is responsible for ensuring that it is properly maintained by a hired external accountant or management company. The committee must then ensure that the relevant person has all the documentation necessary for bookkeeping.
The HOA board should regularly—that is, at least once a year—provide unit owners with information on how their property is being managed. Essentially, they are accountable primarily to the unit owners, because in most cases, the HOA’s accounting is not of great interest to other authorities—such as tax authorities—due to the minimal number of tax returns filed (see below).
Nevertheless, the HOA faces fines for errors in bookkeeping—such as improperly maintained records or a complete failure to keep records—of up to 6% of the value of the HOA’s assets.
If you suspect that the HOA’s accounting is not being handled properly, don’t wait for an audit or a dispute among the owners. We will examine what obligations the board has, whether the necessary documentation was provided to the owners, and how to proceed if the accounting does not reflect the building’s actual financial management.
From the practice of Dostupný advokát:
In HOAs, we often encounter situations where the board views accounting as a purely technical matter handled by an external accountant. However, this is a dangerous oversimplification. An external accountant may process the documents, but the responsibility for ensuring that the homeowners’ association manages its finances transparently, that the owners receive information, and that debts or disputed revenues are resolved in a timely manner remains with the governing body.
Are you solving a similar problem?
Do you need a lawyer for your homeowners' association or housing cooperative?
We can review a contract you’ve submitted or draft a new one for you, represent you in court or in dealings with government agencies, analyze a complex legal issue, or draft the minutes of a members’ meeting or general assembly.
I'd like some advice
- When you order, you know what you will get and how much it will cost.
- We handle everything online or in person at one of our 6 offices.
- We handle 8 out of 10 requests within 2 working days.
- We have specialists for every field of law.
Approval of the Annual Financial Statements
At the end of each fiscal year, every homeowners’ association must prepare annual financial statements that include an overview of the association’s financial management. The association’s board or chairperson submits this summary of financial management for approval.
The annual financial statements consist of:
- a balance sheet,
- a statement of income and loss (income statement),
- notes to the financial statements, which contain supplementary information.
The annual financial statements must be approved by the owners’ meeting and subsequently filed with the Commercial Register. This authority cannot be delegated to any other body of the owners’ association. Approval is granted by a simple majority of the votes of the unit owners present, unless the bylaws specify a different qualified majority.
The unit owners themselves are generally divided into two groups when voting. The larger group is happy to have someone manage their property on their behalf; they trust their elected committee and therefore will vote in favor of virtually any form of the annual financial statements.
A smaller group of unit owners prefers to keep a close eye on their property and carefully checks the individual items in the submitted tables. This is, of course, perfectly fine—as long as they don’t turn into nitpickers who demand proof of every single postage charge listed.
In one case, a unit owner approached us because the board refused to explain several larger items in the financial statements. This was not a matter of “checking every receipt,” but rather significant expenses for repairs and building maintenance. We recommended requesting specific supporting documents, minutes of the board’s decisions, and an explanation of how the costs were allocated. The dispute was ultimately resolved without going to court, as the board, following a legal notice, provided the additional documentation and explained some of the items to the owners at a meeting.
Tip for article
Tip: Avoid mistakes that can lead to both strained relationships in your building and legal complications. The e-book *How to Manage a Homeowners’ Association*, which we’ve written, is designed to offer a helping hand to the leadership and members of homeowners’ associations and housing cooperatives. We’ve included 8 pieces of advice addressing the mistakes our clients most commonly make.
Even for unit owners who are unfamiliar with accounting, items related to the homeowners’ association’s receivables should be important, because if they are not collected, they will become time-barred, and ultimately, other owners may have to contribute toward their payment. Similar attention should be paid to the HOA’s liabilities, for which unit owners may also be legally liable.
Once approved, the financial statements must be published by filing them with the registry of deeds.
Does your HOA have long-term debtors? We can help you establish a legally sound process, from a pre-litigation demand through an installment plan to debt collection. For homeowners’ associations, it is important to act promptly, as delaying debt collection often strains relationships within the building and can also harm other owners.
Tip for article
Tip: The collection of documents is an important part of the Commercial Register, where key documents related to the establishment and ongoing operations of business entities and other organizations listed in the register are stored. What is required by law to be disclosed, and what penalties apply for violations? We’ve written about this in our blog post.
Audit of the Accounts and Financial Statements
The audit committee or an auditor, if appointed, is authorized to audit the accounting records.They shall primarily verify whether the accounting records are maintained correctly and in accordance with the Accounting Act—that is, whether they are clear and complete, including all necessary supporting documents. The committee must also ensure the cooperation of the HOA board.
What about taxes and tax returns?
The HOA’s obligation to file a tax return on a regular basis depends on whether the homeowners’ association has earned taxable income, such as from renting common areas or interest on a bank account. If it has no taxable income, the HOA is not required to file a tax return, which applies to most associations focused solely on building management. The decisive factor is whether the association has only income that is not subject to tax, income that is tax-exempt, or income from which tax is withheld at a special tax rate. A homeowners’ association is not a business entity and typically does not have income subject to taxation. Most of its income comes directly from unit owners for the management of the building and land. This income is not subject to tax.
The most common mistake is determining whether a specific type of income belongs to the homeowners’ association or to individual unit owners, and whether any taxation should be handled by the association or by the unit owner.
A classic example of such a mistake is the handling of rental income from common areas—such as the rental of a former drying room where someone sets up a workshop. From a legal standpoint, this typically constitutes income for the individual co-owners, because the HOA is not the owner of the common areas of the building (although the owners may subsequently decide that the funds will be used within the HOA and do not even need to physically manage them themselves). Nevertheless, they should report this income on their own tax returns.
If the HOA has income that is subject to income tax, it is required to register and subsequently file a tax return. However, there are not many such sources of income ; these include, for example: interest on deposits in the homeowners’ association’s bank accounts, or late payment interest and contractual penalties paid by third parties for breaching obligations under contracts entered into by the homeowners’ association.
HOAs are not VAT payers, so the payment of value-added tax does not apply to them.
Building Management vs. Service Provision
The two main areas covered by a homeowners’ association’s accounting are building management itself (arranging for cleaning, chimney and utility inspections, insurance for common areas of the building, bookkeeping, winter maintenance, etc.) and the provision of residential services, such as water, heat, and electricity for the common areas.
Management costs are considered expenses of the HOA, while costs for residential services are the expenses of the unit owners. Logically, management and service costs must be accounted for separately and in different ways. They will also be reported differently in the financial statements. The government regulation on the adjustment of certain matters related to condominium ownership also helps ensure that certain costs are classified into the correct category.
Utility costs (e.g., water, heat, electricity) are billed to the homeowners’ association by the service providers. These providers require the homeowners’ association to make ongoing advance payments, which the association collects from the unit owners. At the end of the accounting period, the advance payments from the unit owners are compared with the actual costs, and on this basis, overpayments (which are refunded to the owners) and underpayments (which the owners must pay) are determined. Receivables and payables from services are also reported on the balance sheet.
Summary
Proper accounting is crucial for an HOA because it ensures transparent management of the owners’ funds. Every HOA must maintain its accounting records in accordance with the law and, at the end of the year, prepare annual financial statements that provide an overview of its financial situation; these must be approved by the owners’ meeting and filed with the Commercial Register. The obligation to file a tax return arises only if the HOA generates taxable income, such as from interest or the rental of common areas. Otherwise, the HOA is not required to file a tax return. Proper and timely fulfillment of all accounting and tax obligations helps prevent penalties and ensures the smooth operation of the association.
Frequently Asked Questions
Who is responsible for accounting errors in the homeowners' association?
The statutory body of the Owners’ Association—that is, the board or the chairperson—is responsible for ensuring that the accounting is properly maintained. If the accounting is handled by an external accountant or a property management company, that party may be liable for its own contractual breaches, but this does not automatically relieve the board of its responsibility toward the Owners’ Association and the owners.
Can a unit owner review the HOA's financial records?
The owner has the right to inquire about the HOA’s financial management and request information regarding the building’s administration and payments. In practice, it is advisable to request specific documents—such as financial statements, a list of receivables, utility bills, or documentation for major expenses—rather than vaguely asking for “all the accounting records.”
What should you do if the committee refuses to show the accounting records?
First, we recommend submitting a written request and specifying exactly which documents the owner is requesting and why. If the committee does not respond, it may be appropriate to issue a legal notice, raise the matter at a meeting of the owners, or, as a last resort, take legal action.
Is the Owners' Association required to publish its financial statements in the Collection of Documents?
Yes, once approved, the financial statements should be filed in the collection of documents. This is not merely a formality. Publication increases the transparency of financial management, and failure to comply with this obligation can lead to unnecessary complications.
What is the difference between a repair fund and advance payments for utilities?
The repair fund—more specifically, contributions for the management of the building and land—is used primarily for repairs, maintenance, and management of common areas. Advance payments for utilities cover, for example, water, heat, lighting in common areas, or cleaning, and must be billed to the owners in accordance with the rules governing these services.
