If you own more than one rental property, handling your tenants’ security deposits could get dicey. When presented with a check, the knee-jerk reaction is to put it in a checking account— but which one? It’s wise to keep your rental deposits separate from your personal checking account and it could be required by law.
The Best Practice for Holding Security Deposits
Because you must hold onto security deposit funds with care until the end of the lease, you’ll want to keep the money in a neutral location, such as an escrow account, which can be easily accessed to issue refunds.
It’s best to hold the funds in accounts other than your personal one, even if your state or municipality doesn’t require you to do so. If the account earns interest, some states require the landlord to return the interest accrued within the timeframe of refunding a security deposit.
The Benefits of Separate Bank Accounts
1. You can avoid tracking challenges. Without a separate account, it can be nearly impossible to track the security deposit’s location and provide validation in court proceedings. Many states prohibit the comingling of deposit funds with personal accounts, as it could jeopardize your ability to claim deductions for property damage. Keeping the funds separate also ensures accuracy and transparency when managing legal and financial obligations.
2. It prevents accidental spending. Comingling funds with personal or business accounts increases the risk of accidentally using security deposits for unrelated expenses. This oversight could lead to financial shortfalls when it’s time to return the deposit, creating unnecessary liabilities and potential legal disputes. A dedicated account eliminates this risk by strictly separating tenant funds from operating expenses.
3. You will readily know interest amounts. Some states require landlords to return interest earned on security deposits. Calculating and tracking this interest becomes far more complicated when funds aren’t kept in a designated account. By using an interest-bearing escrow account, you can simplify compliance with these regulations and avoid disputes during the refund process.
4. You’ll comply with regulations. While not all states of municipalities require separate accounts for deposits, many do, and penalties for non-compliance can be severe. Familiarizing yourself with state regulations and local requirements will demonstrate professionalism and minimizes the risk of fines or lawsuits.
5. It builds trust with your tenants. Using separate accounts shows tenants that you prioritize fairness and accountability. A well-managed deposit instills confidence, fostering a positive landlord-tenant relationship. This level of professionalism can also help you stand out in competitive rental markets.
Organize Your Finances Without the Hassle
Managing security deposits can get complicated, especially if you own multiple properties. Creating individual accounts for each property can simplify the process, ensure compliance with regulations, and make it easier to track funds. This system not only keeps your records clear but also streamlines the refund process when a lease ends.
There are many ways to organize your bank accounts. You could seek advice from an accountant or financial advisor, but if you only have a couple of rental properties to manage, there’s an easy way to keep them structured. You should have two main bank account types as illustrated below:
#1: Personal
- Checking
Use this account for your day-to-day living expenses, personal home mortgage, and vacations/holidays.
- Savings
This account should hold funds such as your retirement and medical or emergency expenses.
#2: Business
- Operations
This account will cover staff wages, rental property mortgages, repairs, property taxes, and purchasing additional properties.
- Security Deposits
Set up a separate account for each rental to easily track interest earned for each tenancy.
Leverage Apartments.com Rental Tools
Being a landlord means dealing with bookkeeping. Whether it’s managing security deposits or documenting income, staying organized for tax season can be a challenge. Fortunately, Apartments.com has the solution.
Our expense tracking platform allows you summarize rental expenses by property and tax category. You can even download the required tax filing forms directly from your Apartments.com account. And don’t worry if you misplace the forms—they’re backed up in your account for seven years.
By adopting the practices outlined above and using the right tools, you can manage security deposits with ease and professionalism. It’s an excellent way to keep your books organized and save time on managing your finances!
Originally published by Lauren Ross on September 10, 2019
