A change in the Massachusetts Tax Code may turn out to be costly for non-incorporated condo associations, which will now be forced to file as corporations and declare their reserves as taxable property.

The tax code change, which was signed into law by Gov. Deval Patrick last month, requires companies and corporations to file forms under the same designation for federal and state taxes.

Condo associations currently file federally as corporations, but there are several elections that protect their income from taxation, according to Thomas Moriarty, vice president of the Real Estate Bar Association (REBA) and partner at Marcus, Errico, Emmer & Brooks, PC in Boston. Moriarty said under the current state tax policy, “there is no similar election procedure.”

As a result, all condo associations will have to pay at least $456, the minimum corporate tax. Larger associations with significant reserves for capital improvements and repairs will be on the hook for much more.

Moriarty sees that possibility as unfair to condo owners, who will be penalized for doing nothing more than following Massachusetts condo law and holding reserves in case of building emergencies.

“That money that’s in the reserve account could be for an expense that’s 15 years in the future,” Moriarty said. “If the condo is taxed because it’s holding reserve funds, if that’s considered part of its net worth, then that’s a serious flaw in the tax policy.

“At end of the year, [homeowners] don’t get taxed because they saved $5,000 to put toward roof and some siding.”

Hidden Costs

Condo associations will now be taxed at the corporate rate for any interest income generated by the reserves, which is 9.5 percent, instead of the personal rate, which is 5.3 percent. The corporate tax rate will be reduced over three years to 8 percent.

Kenneth Bloom, a partner at Bloom Cohen Hayes LLC in Needham that specializes in condos, said while larger associations may have more in reserves to tax, the real impact may be felt at smaller buildings with two, three, or four units. They too will have to file the same tax forms, and pay the minimum of $456.

But in those buildings, the taxes were likely prepared by the association’s treasurer, which probably will not be possible if this change is upheld. That will force the association to hire an accountant for record keeping and tax form preparation, which will serve as another cost.

“This corporate return is much more complicated, and it requires an association to improve their record keeping, because the mass tax return is going to require a balance sheet,” Bloom said. “The amount this will affect the small associations will be disproportionately high. In a very small building, that’s going to be a big hit on a few people’s pocketbooks.”

Robert Bliss, a spokesperson for the state’s Department of Revenue (DOR), said this round of corporate tax reform is meant to tighten loopholes for business trusts and partnerships, which were picking and choosing whichever tax designations were the most favorable.

He acknowledged that condo associations will be affected by the reforms, but downplayed the severity of the burden. Bliss pointed out that the rate the reserves will be taxed is .0026 percent, meaning reserves of $1,000,000 will pay a tax of $2,600.

“As far as the net worth taxes goes, you’d have to have reserves, or funds, in excess of $175,384 [to pay more than the minimum tax],” Bliss said.

Bloom said he did not believe this was a money grab on the part of the state government – this was more an attempt to normalize and clarify the tax process.

However, Bloom said by requiring condo associations to hold reserves, and then taxing them, the state may have contradicted itself.

“It’s a conflict in the public policy issues,” Bloom said. “Most states recognize that condo associations are different than a for-profit entity. Real big picture, the dollars aren’t staggering. But philosophically, it’s not right.”

Moriarty said in 1986 DOR made a directive stating condo associations would get the same treatment in the state as they did federally.

“There is no reason that shouldn’t remain in full force and effect,” Moriarty said. “[These changes] have been enacted, and now the approach to the industry is to make sure by the Legislature trying to address business trusts in Massachusetts, that condo owners and associations don’t get swept into this vortex.”