All associations should have a replacement fund. Many are required to do so by the governing documents and Virginia law. Even if they are not, the board should fund a replacement account to fulfil its fiduciary duty. Most major components wear out over time and there must be funds available to replace them when they do.

To determine the amount needed to be placed into the reserve account, most commonly, the "pay as you go" method is used. An alternative for accumulating funds is to have the Association levy a special assessment on the unit owners to pay for the cost of necessary repairs or replacement of deteriorated common elements as the elements are replaced.

The proper method to obtain funds for a replacement reserve is to determine the costs to replace facilities and materials and annually set aside funds in advance to cover these costs. This method ensures that everyone contributes their fair share into the fund. This method also assures that those who are using the facilities are responsible for the costs while they are being used.

Costs of replacement can vary greatly due to fluctuation in the cost of materials, type of replacement materials, status of the labor market, and cost of contractor overhead at the time the replacement work is expected to be carried out.

The IRS does not allow (for tax deductions) routine maintenance items to be included in a Replacement Reserve Fund. However, it should be noted that such items as painting, power washing, wood preservative treatment and landscaping have the possibility of being major expenses and the Association should accumulate funds for them as well.

In addition, as of July 1, 2002, Virginia law requires associations to conduct, at least once every five years, a study to determine the necessity and amount of reserves required to repair, replace and restore the common elements and to review and adjust the reserve amounts annually. It must be reviewed annually and the board minutes should reflect that this is done.