Board has options on filing tax returns

Q: I was elected to our condominium association board of directors along with two other new board members. We found out that the prior boards did not arrange for the preparation and filing of the association’s income tax returns. First, we are not sure if our condominium association is required to file income tax returns and, if so, can the current board members sign for the prior year’s returns?

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, permit 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% 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.

Additionally, the current condominium board can — and should — cause the delinquent federal income-tax returns to be prepared and filed, and the current authorized officer can sign them. The fact that the returns relate to years when a different board was in office does not, by itself, prevent the current board from signing.

The current treasurer or president is not signing to say that he or she personally prepared or supervised the financial activities during the prior board’s tenure. Rather, the officer is signing on behalf of the condominium association, which is the taxpayer.

Q: I recently moved to Illinois and, because of my prior experience on an association board, was persuaded to fill a vacancy on our condominium board. We had a discussion at our last board meeting about collection of unpaid assessments. Board members kept referring to “eviction proceedings.” The association in the state I moved from had to do lien foreclosures to collect unpaid assessments. What were the board members referring to when they referred to “eviction proceedings?”

A: Illinois is unique in that it allows condominium and common interest community associations to use the forcible entry and detainer (eviction) lawsuit to collect unpaid assessments from unit owners. This is similar to the legal action that a landlord takes against a tenant who is not paying rent.

This legal remedy allows an association to obtain an order of possession of the owner’s unit. If the owner does not satisfy the judgment within a time set forth in the court’s order, the sheriff will evict the owner from the unit and the owner's possessions will be removed from the unit, and award possession of the unit to the association.

But let me underscore that the association takes temporary possession of the owner’s unit; the association does not take ownership of the unit. Once the association takes possession of the unit, the association leases the unit to a third party. The rent received pays the judgment.

Once the owner’s account is brought current, possession of the unit can be restored to the unit owner. The forcible entry and detainer action is very effective and the potential for eviction can persuade owners to satisfy a judgment so avoid being evicted.

• Matthew Moodhe is an attorney with Kovitz Shifrin Nesbit in the Chicago suburbs. 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.