replacement reserve

Replacement Reserve

In real estate accounting, money set aside to purchase new materials that are expected to be bought as older materials wear out and need to be replaced. The replacement reserve may be listed on a financial statement as a phantom expense, and may be credited back if it is not actually spent.

replacement reserve

An amount of money set aside because building components or equipment will wear out in a relatively short time and need to be replaced.Replacement reserves can be a mere accounting entry as a phantom expense item reducing net operating income each month, or it can be money actually deposited into an account and earmarked for replacements.If the money is set aside into a separate account,any contract for the purchase of that property or business should include a clause addressing who gets the money—the purchaser or seller.When purchasing a condo or co-op,or a home in a planned unit development,the buyer should make sure there are adequate cash replacement reserves for the future.If not, then repairs will not be made or they will be made only after assessments against all owners.