Homeowners association reserve funds are not considered taxable income. But, if you use your reserves to pay for operating expenses, you automatically make them taxable. It is also worth noting that the account in which you put your reserves can determine whether or not it is taxable. If you keep your reserve funds in the same account as your operating funds, then the IRS will deem it as taxable income. Along with setting up internal controls, taxation is a good reason to keep your reserve in a separate, interest-bearing account. Though, the interest you earn on your reserves is still taxable.