HOA reserves: what your auditor actually looks at
Short answer: When auditing or reviewing an HOA or condo association, the CPA focuses on whether reserve balances are real and properly separated (bank and investment statements), whether money moved between operating and reserve funds was authorized and recorded, whether reserve spending was for approved components, and whether the statements include the required disclosures on future major repairs and replacements, usually drawn from your reserve study. Boards should have the reserve study, account statements, transfer approvals and minutes ready before fieldwork.
Key takeaways
- Reserve cash and investments are confirmed directly with banks and brokers.
- Interfund borrowing between operating and reserve funds needs board approval and a repayment plan.
- Reserve expenditures should match components in the reserve study and the governing documents.
- GAAP for common interest realty associations requires disclosure of future major repairs and replacements.
- Interest on reserves is taxable income on Form 1120-H.
- Florida condos face additional structural integrity reserve rules.
Why do auditors focus so much on reserves?
Reserves are often an association's largest asset, and they matter most to owners and buyers. They are also where problems show up: underfunding, unauthorized transfers to cover operating shortfalls, commingled accounts, and spending that doesn't match the reserve plan. Lenders, insurers and buyers increasingly look at reserve health, and after the 2021 Surfside collapse, regulators do too.
How do auditors verify reserve balances?
- Confirmations: the auditor confirms reserve bank, CD and brokerage balances directly with the institutions.
- Account titling: accounts should be in the association's name, not the management company's or a board member's.
- Separation: if reserves are commingled with operating funds for investment, the records must still track them separately, and the account shouldn't drop below the reserve balance.
- FDIC coverage: large balances spread across institutions or in insured programs reduce risk, and auditors may note concentrations of credit risk in the disclosures.
- Investment valuation: CDs, treasuries and other investments are checked for fair value and maturity classification.
Interfund transfers and borrowing
This is where auditors most often find issues. When the operating fund borrows from reserves to cover a shortfall:
- The transfer should be approved by the board and documented in the minutes.
- It should be permitted by the governing documents and state law. Some states and documents restrict or prohibit using reserves for operations.
- There should be a repayment plan, and the amount due between funds should be recorded on both funds' books.
- Year-end interfund balances should reconcile, meaning the operating fund's payable equals the reserve fund's receivable.
Repeated unrepaid borrowing may need disclosure and can signal the association needs a dues increase or special assessment.
How do auditors test reserve spending?
Auditors sample reserve expenditures and check that each one:
- Was for a component included in the reserve study or approved for reserve funding
- Was supported by a contract, invoice and proof of payment
- Was approved under your governing documents and procurement policies, including any bid requirements
- Was correctly recorded, either expensed or capitalized, in the reserve fund
What auditors want from your reserve study
A reserve study lists each major component (roofs, paving, elevators, pools, painting, HVAC), its estimated remaining useful life and replacement cost, and a funding plan. Auditors don't audit the study itself, but they use it to:
- Prepare or check the required supplementary information on future major repairs and replacements
- Compare the funding plan with actual contributions
- Evaluate whether disclosures about funding methods and any underfunding are adequate
Have the most recent study available, including its date, preparer, and whether it was a full study or an update. An outdated study, especially one more than three to five years old, limits how useful the disclosure is.
What disclosures are required for reserves?
Under GAAP for common interest realty associations (FASB ASC 972), financial statements should disclose the association's funding policy for future major repairs and replacements, whether a study was done and how estimates were made, and amounts designated for those purposes. Associations typically present unaudited supplementary information showing each component's estimated remaining life and replacement cost. The auditor applies limited procedures to that information but doesn't audit it.
Under revenue recognition rules (ASC 606), some associations record reserve assessments that haven't yet been spent as a contract liability, rather than revenue. Your CPA will discuss the approach that fits your documents and practice.
Are reserves taxed?
Reserve contributions from owners are generally exempt function income on Form 1120-H. Interest and dividends earned on reserve accounts are taxable at the 30% Form 1120-H rate. With higher interest rates, that tax has become meaningful for many associations, which is a reason to compare Form 1120. See Form 1120-H vs Form 1120.
Florida condo reserve rules
Florida's post-Surfside laws added a structural integrity reserve study (SIRS) requirement for condominium buildings three stories or higher, and restricted owners' ability to waive or reduce reserve funding for SIRS components. Florida also requires detailed reserve disclosures in the year-end financial report, including the amount needed to fully fund reserves on a straight-line basis. See our Florida financial reporting guide.
Board checklist: have these ready before fieldwork
- Year-end statements for every reserve bank, CD and investment account
- Reserve fund roll-forward: beginning balance, contributions, interest, expenditures, transfers, ending balance
- The latest reserve study and any updates
- Board minutes approving reserve expenditures and interfund transfers
- Contracts and invoices for major reserve projects
- Interfund balance reconciliation
- Any owner votes on reserve funding or waivers
We perform audits and reviews for HOAs and condo associations and can help your board get organized before year-end.
Frequently asked questions
Does an auditor audit the reserve study?
No. The auditor uses the reserve study to support required disclosures and to compare funding with the plan, but the study itself is not audited.
Can an HOA borrow from its reserve fund?
Sometimes, if the governing documents and state law allow it. The board should approve the transfer, document it in the minutes and adopt a repayment plan.
Is interest on HOA reserves taxable?
Yes. Interest and dividends on reserve accounts are non-exempt income and are taxable on Form 1120-H at 30%, or on Form 1120 at 21% if that return is used.
What is the supplementary information on future major repairs and replacements?
It is unaudited information presented with the financial statements showing each major component's estimated remaining useful life and replacement cost, usually based on the reserve study.
How often should an HOA update its reserve study?
Requirements vary by state and governing documents. Many associations update every three to five years, with annual reviews of the funding plan.
GreyWood CPA PLLC is a licensed CPA firm headquartered in Richmond, Virginia (Virginia Board of Accountancy firm license #134961), serving nonprofits, community associations and businesses nationwide. This article is general information as of November 18, 2025, not legal or tax advice for a specific organization. Rules change, so confirm current requirements before acting.