Hawaii Condo Law

Joe West in his Community Associations Network recently wrote about the stupid legislative amendment of the year. The proposed amendment would require associations in Arizona to have a website with current rules and schedule of fees and fines. Failure to do so would require the Association to pay $1,000 per violation (plus $100 per day) to each member. Of course, the Association’s funds come from the owners. So, the association would assess each owner for the fine that they would pay to the owner. Although this is a more extreme example of misunderstanding the source of an association’s funds, we see variations of this all the time. In one case, some homeowners demanded that they should be reimbursed for their hotel expenses when the project was undergoing necessary repairs. Even if the association were obligated to reimburse those expenses, it would mean that all the other owners could have made the same demand. The result would be the same — the association assessing all owners the hotel expenses to pay the expenses.

Going back to legislation, bills often propose expanding the obligations of associations without regard to the fact that these new obligations cost money. Often these bills claim to help homeowners but they do not always consider the association’s cost is paid by those same homeowners. The fact that an association is made up of the homeowners is hidden by the fact that the association is an entity.

There are normally two options for most community associations to file their federal tax returns. The 1120-H tax form is a special filing available only for certain homeowner associations. The 1120-H tax form is authorized under Internal Revenue Code §528 (26 U.S.C. §528). Only certain homeowner associations qualify to file an 1120-H tax form. A homeowner association qualifies if:

1. it is organized and operated to provide for the acquisition, construction, management, maintenance, and care of association property;
2. substantially all of the units (85%) must be used for residential purposes.
3. it elects to have the section apply for the taxable year;
4. no part of the net earnings of the association inures to any private shareholder or individual;
5. 60% or more of the association’s gross income consists solely of amounts received as membership dues, fees, or assessments from owners of residential units, residences or residential lots (exempt function income); and
6. 90%or more of the association’s expenditures for the taxable year are expenditures for the acquisition, construction, management, maintenance, and care of association property.

If the homeowners association qualifies under Section 528, the dues or assessments received from property owner-members of the association are exempt from taxation if the dues and assessments are used for the maintenance and improvement of its property. All non-exempt income is taxed at the 30% tax rate from the first dollar of income.

If the association does not elect to file an 1120-H tax form or is not qualified, it must file an 1120 tax form. Under Internal Revenue Code §277 (26 U.S.C. §277), the income of homeowner associations are treated the same as a corporation. Membership dues or assessments are taxable subject to applicable deductions and adjustments.

On March 31, 2005, the Mayor of the City and County of Honolulu signed into law Ordinance 05-007. The new law deals with dangerous dogs. Sec. 7-7.1 of the Honolulu Revised Ordinances defines “Dangerous dog” as any dog which, without provocation, attacks a person or animal. A dog’s breed shall not be considered in determining whether or not it is dangerous.

If a dangerous dog injures someone other than the dog’s owner, special conditions are placed on the dog and the dog owner. One of the new conditions is that when outside the owner’s premises, the dog shall be attended and kept on a leash no longer than four feet in length and under the control of a person eighteen years of age or older. It is likely that a court would treat the common elements of a condominium project as “outside the owner’s premises”. Therefore, if there is a dangerous dog in your project the City Ordinance will require that the dog be kept on a short leash.