Real estate trust account fundamentals (2022)
All the rules and regulations involved with renting or leasing real estate properties can get a little confusing. Especially with all the changes over the last few years.
Tenancy agreements now look different to those of just a few short years ago, and many property managers have had to ask long-term tenants to sign updated contracts.
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Now, governments across New Zealand are cracking down on the importance of appropriately managing the money you hold on behalf of your residents – making you legally responsible for the safety of that cash.
It’s a little frightening… and makes an in-depth understanding of trust accounting essential to your future success.
What is a trust account?
When a business (or organisation) has to hold onto other people’s money, the law requires the money to be kept in a particular type of bank account called a trust account. In real estate, this happens quite often, especially in the case of rental deposits.
There are also three closely related, but unique terms that are key to this area:
- Trust Account: This is a particular type of business bank account used for holding money that does not belong to your business.
- Trust Accounting: This is the process involved in bookkeeping, auditing and reporting so that your trust account remains compliant with the laws and regulations.
- Trust Accountant: This is an accountant that specialises in overseeing trust accounts.
Some property management companies have a trust accountant as a member of their full-time staff.
However, more and more, property managers are using comprehensive property management software to manage this part of their business. Why wouldn’t they? It’s convenient, easy, and takes away a lot of the stress of deciding what money needs to go where.
What is the purpose of a trust account?
Car dealers, attorneys, real estate companies and many other businesses are legally required to have trust accounts.
Well, if you think about it, the real estate agent acts as a mini bank while holding funds, so it makes sense for financial regulators to put laws in place to protect all concerned.
Otherwise, it’d likely be the regular consumers that suffer; and nobody wants that. So, trust accounts were formed.
Why do property managers need trust accounts?
For a property management firm, holding money for both property owners and tenants is a critical function of the business.
Real estate trust accounts help you manage your assets.
Let’s imagine a worst-case scenario.
Say, for example, a tenant puts down the first and last month’s rent as a deposit for a security bond on a unit. With the best of intentions, the property manager puts the money under their mattress for safekeeping.
Later, the property manager has a big unexpected bill come through, and they use the tenant’s deposit to cover it. When the lease is up, the property manager has not been able to replace the money, and now they are not able to give the tenant their deposit back within the legal timeframe.
If only they’d put the money into a trust account, where they wouldn’t be tempted to spend it.
You can probably guess that this type of situation has arisen over and over again in the past and this is the reason why there are laws and regulations to prevent such an unfortunate situation.
How do property managers open a trust account?
For a property manager, trust accounting begins with a special business bank account. Each state in New Zealand has its own list of authorised deposit-taking institutions.
Your situation may vary, but most likely, the only person who can open the account will be the owner or a director of your property management business.
If you are going to open a trust account for your business, you must ensure you are meeting legal obligations for your state or territory.
States and local governments vary in their regulations. It is best to find out what is required by your local government to make sure you are compliant.
What should you put Into a real estate trust account?
If you are the owner of a real estate business, you are responsible for ensuring the right funds go into the right bank accounts.
All transactions will either be trust money that needs to be deposited into a trust account or money that is not connected to a trust and therefore belongs in a general business account.
Funds that should be in a trust account
- All rental bonds and security deposits.
- All payment deposits and pre-payments.
- Upfront rent for certain leases over 90 days.
- All fees received ahead of advertising.
- All utility costs related to your properties/buildings.
Funds that should not be in a trust account
- Payments for real estate agency services.
- Payments from trust accounts that the estate agent is entitled to receive.
Top 4 common trust accounting mistakes
Starting to understand why real estate trust accounts are so critically important to staying “above-board” with the government? Great!
Keep in mind these common errors as you develop your trust accounting systems and processes – as the last thing you want to do is make an expensive mistake.
Getting your trust account fundamentals in place will go far to keep you compliant.
1. Absence of guidelines
If your process documentation is missing key components or is non-existent it is advisable that you get this documentation in order.
2. Absence of assets
Small offices and solo specialists battle to keep up with accurate bookkeeping. They may not have the resources to prepare and maintain their trust bookkeeping routines for end-of-month. These types of businesses are an excellent candidate for scalable trust accounting software which can make their workflow significantly less demanding.
3. Manual frameworks
Recording exchanges physically is the prime reason bookkeeping is botched and can frequently be traced back to human error.
4. Trust reserves become coexisted
A classic no-no is the blending of put stock in reserves. Once the assets intermix it is significantly more difficult to track them precisely. If this happens, it can give an appearance that you are up to something dodgy if you get audited.
Your real estate trust account best practices
While these may seem like common sense, we recommend you take the below into consideration to keep your trust accounts operating at optimum efficiency, and to ensure everything runs smoothly:
- Be Transparent: Note why you’re withdrawing or receipting money. It will save you a lot of time and hassle both now and in the future
- Create Digital Records: Report and track every deposit that enters your trust account
- Reconcile Regularly: Your bank account needs to match your trust accounting software transactions. This demonstrates that you’re on top of everything and that nothing has been missed.
Additionally, to guarantee lawful commitments are met in your trust accounting processes, it is essential to understand that requirements vary from state to state. States typically will post their guidelines online, but again, you are best to seek professional legal advice for your specific situation.
Real estate trust account fundamentals – FAQs
It’s a lot to ponder over, isn’t it?
On the one hand, you want to be confident you can easily access money when an unpredictable bill arises because of a tenant accident. On the other, you need to ensure you always have money set aside to repay someone’s security deposit when they are leaving their apartment.
If you’re still confused about the ins and outs of it all, maybe these FAQs can point you in the right direction. You can always talk to the experts at MRI Software with no strings attached.
They are a private legal arrangement where one person’s assets are put in an account managed by someone else for their benefit.
You legally have to pay certain incomes into a trust account, whilst the same can not be said for a general one.
They should be used to store payments for deposits, bonds, upfront fees, and some rental incomes.
Real estate trust account guide from MRI Software
If mathematics was not your forte and you chose a career in property management to avoid crunching the numbers, we can imagine the shock when you learned you would be managing real estate trust accounts.
It can be a bit mind-boggling, so we’ve pulled together a handy guide to help you start as well as a quick rundown of trust accounting basics in property management.
Download it for more guidance, or, if you’re ready to get started… contact us today for more information on the future of trust accounting through property management software.
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