What Is Depreciation?

Depreciation is used in all types of homeowners’ associations (HOAs). Depreciation is a method of estimating how an asset’s value decreases over time.

For example, if your HOA installs a new laundry room with washing machines and dryers, this investment will lose value over time. A washing machine worth $1,000 when new might only be worth $800 a year later.

By calculating this reduction in value, depreciation reflects the HOA’s actual financial situation. Depreciation is recorded in the annual financial report as an expense, ensuring transparency in the association’s finances.

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Why Is Depreciation Important for HOAs?

Recording depreciation provides a clear picture of your HOA’s financial status and helps guide decision-making. It is important for all types of HOAs, including condominium associations, neighborhood associations, and cooperatives.

Here’s why depreciation matters:

  1. Fair Pricing: Depreciation affects property sale and purchase prices. Without depreciation, assets may be overvalued, leading to potential disputes or financial compensation claims between buyers and sellers. 
  2. Investment Planning: Depreciation highlights when investments are needed. For example, depreciation of laundry room equipment might indicate it’s time to replace the machines after 20 years due to their low residual value.

How Does Depreciation Work in Practice?

Depreciation must be included in your HOA’s financial records. The board should decide on a depreciation method and clearly outline it in the association’s governing documents. Consulting a professional appraiser or accountant is recommended to ensure accuracy and avoid disputes.

Here are three common methods of depreciation:

  • Straight-line depreciation: The asset loses the same value each year.
  • Declining balance depreciation: The asset loses more value in its early years.
  • Usage-based depreciation: The asset is depreciated based on its usage.

For example, if a laundry room costs $40,000 to install and the HOA decides on a straight-line depreciation method over 20 years, the annual depreciation would be:

$40,000 ÷ 20 years = $2,000 per year.

This amount is recorded as an expense in the HOA’s financial report, reducing the association’s balance accordingly.

In Denmark organizations like ABF have guidelines for how deprecation works. How to properly calculate the deprecation for your HOA can be advised from local authorities.

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Examples of Depreciable Assets in an HOA

Any asset with an acquisition cost can typically be depreciated. Common examples include:

  • Renovations
  • Elevators
  • Heating systems
  • Security systems
  • IT equipment
  • Maintenance of common areas
  • Furniture and fixtures
  • Laundry facilities

Establish Clear Rules for Depreciation

Without clear rules, disputes may arise among HOA members. To avoid this, include depreciation policies in your governing documents or even by-laws. Consulting an expert to determine appropriate depreciation rates and timelines can further ensure fairness and transparency.

You can read more about how to set up by-laws inside Anyhoa.com here.

Clear policies benefit everyone by promoting trust and preventing conflicts over property values and HOA fees.

Who Is Responsible for Depreciation in an HOA?

The board is responsible for ensuring depreciation is recorded correctly, reflecting the HOA’s financial health. If the board lacks expertise, hiring an accountant or offering training sessions can be a good solution.

One option is to create courses for how to handle depreciation directly in Anyhoa.com.

Immediate Depreciation for Smaller Assets

Instead of depreciating an asset over several years, smaller assets can sometimes be written off immediately. The threshold for immediate depreciation varies by country, so consult local regulations for specific guidelines.

Immediate depreciation can simplify accounting and provide financial advantages by reducing taxable income. An accountant can help your HOA determine the best approach.

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Use Anyhoa for Transparency

With Anyhoa’s website solutions, your HOA can clearly communicate depreciation rules and other financial details. Ensure all residents have access to your governing documents and policies. Using our platform, you can easily upload and update documents, ensuring everyone stays informed.

If you’re looking for an intuitive and user-friendly HOA website, contact us for a no-obligation consultation. Let’s make managing your HOA easier!