Interest on Funds Borrowed from Reserve Fund?

M.O. from New Haven County, Connecticut writes:

Dear Mister Condo,

Can you charge interest to the association for a loan from the reserve to fund a big project?

Mister Condo replies:

M.O., at a time when many associations are finding it very difficult to find the funds to pay for much-needed repairs to their common areas, it sounds like your community did a good job saving enough money in the Reserve Fund to go ahead and loan it back to the association for the actual repair. Congratulations to your Board for practicing good fiscal responsibility by being ready for this expense.

I checked with my friend, Sam Tomasetti, CPA of Tomasetti, Kulas & Company, P.C. to give us a proper answer. Here’s what Sam had to say:

“From a purely financial point of view: If it is all within one association’s funds (and does not have a tax district or special services district separate entity implication), the interest income and interest expense would offset in terms of the cash flow requirement as it would impact someone’s regular condo fees so I am not sure why an association would want to do it.  If they still want to do it, I would have to do some research on whether self-charged interest would be taxable and secondly, if it is taxable, I would think that since you are allowed to deduct the cost of earning taxable income against the income, the self-charged interest expense might be deductible as an offset and therefore there would be no tax effect.”