As property managers we handle other people’s money on a regular basis. For example, when we collect a security deposit, we’re handling the tenant’s money and when we collect rent or pay a bill on behalf of a property owner, we’re handling the owner’s money. With all this money floating around, it’s critical that we know whose money belongs to whom. That’s where specialized accounting software designed for property management comes in; but having the right software is only half the battle. The other part is knowing your options for handling other people’s money (and the rules that go along with them).
Trust accounting to the rescue!
One accounting option is to keep everyone’s money in separate bank accounts. It’s the obvious choice and may in fact be the only one you’ve considered. It’s straight-forward and simple, so what’s the catch? The answer is time. Think about how long it takes to balance your own checkbook. Now multiply that by five, ten, or two hundred! That’s the number of checkbooks you’d have to balance if you had one bank account for each property owner.
So what’s the alternative? Having one bank account and doing something called trust accounting. Trust accounting sounds intimidating, but it’s really nothing more than keeping track of the money you’ve received, held and paid out on behalf of each property owner.
A bank vault full of safe deposit boxes
An easy way to think of trust accounting is to imagine a bank vault filled with safe deposit boxes, each belonging to a different property owner. Although everyone’s money is kept in the same vault, each person’s stash is kept separate. Likewise, with trust accounting, even though everyone’s money is held in the same bank account, each owner’s money is tracked separately and accounted for.
Know the rules – check with your State before getting started
The first step to setting up a trust account is checking your state’s laws; when it comes to trust accounting none of us want to be the next Kenneth Lay. You should check the laws to make sure you are doing it correctly. Bear in mind that the account should be set up in the name of your Solar Produkte company, not the name of the property owner. In the past, the IRS has seized funds in trust accounts because they had a lien against the property owner and the account was in the owner’s name. If you drop the ball and keep the money in the name of the property owner, the same could happen to you. And remember, there won’t be an IRS agent standing in front of your tenants explaining why their deposits were taken to pay a tax bill. It will be you!
No commingling
While you’re allowed to hold money from different property owners in a single trust account, you’re not allowed to commingle their money from an accounting perspective. In other words, you’re not allowed to pay money out on behalf of a property owner using other people’s money, even if you square things up later. The rules are even stricter when it comes to your money. It’s not enough to keep your money separate from an accounting perspective. In most cases, you’re also required to keep your money in a separate bank account.
Trust accounting
how hard can it be?
Trust accounting isn’t very hard, but it’s easy to slip up if you’re not careful. Let’s take a look at an example. Suppose you’re holding money that belongs to two different property owners in a trust account: Sam Shortfall and William Windfall.
Now imagine that a washing machine in one of Sam Shortfall’s properties is on the fritz. A pipe bursts and there is water everywhere. When all is said and done, there is a bill for $800. But wait… Sam Shortfall doesn’t have enough money in the trust account to cover the bill. What do you do?
The wrong way – use someone else’s money
Use Your Own Money
No worries… there’s enough money in the trust account to cover it. You’ll pay the bill and withhold $200 ($800 bill – $600 cash on hand) from Sam next month when his rents come in. Sure you’re technically using someone else’s money, but you’ll square things up next month so what’s the big deal? Well, for starters it’s bad accounting. What happens when Sam Shortfall is short again next month? Are you going to continue to rob Peter to pay Paul? If that’s not reason enough, let’s go with the best reason not to do it; it’s against the rules.
The wrong way again – use your own money
OK. So you can’t use someone else’s money. That makes sense, but what if you use your own? You’ll just deduct it from Sam’s rents next month. Since it’s your money, you can do what you want, right? Wrong again. Do you really want to be in the loan business? Besides, commingling your own funds is almost always against the rules.
The right way – ask Sam for more money
The right way is to ask Sam for more money? What do you mean ask him for more money? He hired you to manage his property. He doesn’t want to be bothered by bursting pipes and pesky bills. Let’s do a quick reality check. Sam hired you to manage his property and pay bills on his behalf, but Sam still owns the property. That means Sam is responsible for coming up with the money and paying the bills, not you.
Use trust accounting
So what’s the bottom-line? Open a trust account and use trust accounting. Fewer bank accounts and fewer signature cards, means less time opening new accounts and less time spent reconciling them each month. But make it easy on yourself. Know the rules and get yourself the right software. Before long you’ll wonder how you got along doing things any other way.
