'Six-month' rule to recover fees, assessments is confusing

Q. There is a lot of confusion at our condominium association as to the amount of assessments and expenses, like legal fees, our association is entitled to recover under the "six-month rule" from the purchaser of a unit at a foreclosure sale. We have been charging the new owner assessments and legal fees that were due and owing from the former owner for the six-month period just prior to the judicial sale in the foreclosure. We are getting a lot of pushback. Can you please explain the rule?

A. The issue you raise continues to be one of the most misunderstood day-to-day matters that an Illinois condominium faces. The misunderstanding is often perpetuated by aggressive positions taken by associations that may be confused with what the association is actually entitled to recover under the governing law.

This is in large part the result of a less-than-well-drafted statutory provision. Section 9(g)(4) of the Illinois Condominium Property Act, 765 ILCS 605/9(g)(4), states as follows:

"The purchaser of a condominium unit at a judicial foreclosure sale, other than a mortgagee, who takes possession of a condominium unit pursuant to a court order or a purchaser who acquires title from a mortgagee shall have the duty to pay the proportionate share, if any, of the common expenses for the unit which would have become due in the absence of any assessment acceleration during the six months immediately preceding institution of an action to enforce the collection of assessments, and which remain unpaid by the owner during whose possession the assessments accrued. If the outstanding assessments are paid at any time during any action to enforce the collection of assessments, the purchaser shall have no obligation to pay any assessments which accrued before he or she acquired title."

The filing date of a lawsuit by the association - against the former owner to collect unpaid assessments - determines which months' assessments/expenses, like legal fees, the new owner is required to pay. That is because it is those assessments and expenses that remain unpaid as of the judicial foreclosure sale. They became due in the six months preceding the filing of the association's lawsuit, and the association can collect them from the new owner.

In summary, the six-month "look back" period ends with the date the association files suit against the former owner, and not the date of the judicial sale in the foreclosure. Still confused? You are not alone. This needs to be fixed by the legislature; however, the last attempt failed.

Q. Does our community association need to pay income taxes?

A. Condominium and other forms of community associations are entities that must account for their taxable income. Even if no tax is owed, there is still a filing requirement. A community association will generally not qualify for tax-exempt status under Section 501(c) of the Internal Revenue Code. Nonetheless, Section 528 of the code permits a qualifying community association to make an election to receive certain tax benefits that, in effect, permits the exclusion of certain income (referred to as "exempt function income") from its gross income, thereby reducing (if not eliminating) its income tax liability. If such an election is made, the community association is not taxed on its exempt function income. However, the community association is taxed at the rate of 30 percent of the "homeowners association taxable income." This rate applies to both ordinary income and capital gains. Associations should speak with their accountant to determine on what form (Form 1120-H or Form 1120) it should file to have the least (if any) tax liability.

• David M. Bendoff is an attorney with Kovitz Shifrin Nesbit in Buffalo Grove. Send questions for the column to him at CondoTalk@ksnlaw.com. The firm provides legal service to condominium, townhouse, homeowner associations and housing cooperatives. This column is not a substitute for consultation with legal counsel.