Glossary
What is trust accounting in property management?
Quick answer
Trust accounting is the set of records a property manager keeps for money that belongs to other people, such as owner rent and resident security deposits. The money sits in a separate trust bank account, and each owner and resident has a separate ledger. In California, for example, a broker must deposit trust funds within three business days and reconcile the trust account at least once a month. Rules vary by state.
Trust accounting is how a property manager records and protects money that belongs to owners and residents. The manager holds the money in a trust bank account and keeps a separate ledger for each owner or resident who has money in it.
How trust accounting works
A property manager collects rent, security deposits, and other funds for clients. That money is not the manager's money. State real estate rules usually require three controls:
A separate bank account. Trust money stays out of the company's operating account. Mixing the two is called commingling.
A record for each beneficiary. In California, each owner or transaction needs its own record with the date and amount of each deposit and disbursement, and the running balance (10 CCR Section 2831.1).
Regular reconciliation. In California, the broker must reconcile the beneficiary records with the record of all trust funds received and disbursed at least once a month, except in months with no activity (10 CCR Section 2831.2).
California also requires a broker to place trust funds into a trust account, a neutral escrow, or the hands of the principal no later than three business days after receipt (10 CCR Section 2832). Other states set their own deadlines and audit rules. Check your state real estate commission before you set a policy. This page is not legal advice.
Example: a three-way reconciliation
A manager holds trust funds for three owners. At month end, three numbers must agree: the adjusted bank balance, the trust account book balance, and the total of the owner ledgers.
Item | Amount |
|---|---|
Bank statement ending balance | $50,100 |
Less outstanding check #2214 | -$2,350 |
Plus deposit in transit | +$500 |
Adjusted bank balance | $48,250 |
Trust account book balance | $48,250 |
Owner A ledger | $21,400 |
Owner B ledger | $15,600 |
Owner C ledger | $11,250 |
Total of owner ledgers | $48,250 |
The adjusted bank balance is $50,100 - $2,350 + $500 = $48,250. The owner ledgers add to $21,400 + $15,600 + $11,250 = $48,250. All three numbers agree, so the account is in balance. If the owner ledgers added to $48,900, the $650 difference would need an explanation before anyone sends a distribution. A common cause is a payment posted to the wrong owner.
Related terms
Bank reconciliation: the two-way check of bank against books.
Security deposit: resident money that many states require you to hold in trust.
Owner distribution: the payment that reduces an owner's trust balance.
Owner statement: the monthly report built from the owner ledger.
Where software helps
Software keeps the owner ledgers, the trust book balance, and the bank feed in one place, so the three-way check takes minutes instead of a spreadsheet. Darcy's accounting module includes banking, a general ledger with trust accounts, and owner statements and distributions. During the month-end close, Darcy matches bank lines and flags anything that does not add up. For a ranked list of tools, see the best trust accounting software. To see the close on a portfolio like yours, book a demo.
Questions, answered
Is trust accounting required by law?
In most states, a licensed broker who holds client funds must follow trust account rules set by the state real estate regulator. The details, such as deposit deadlines and reconciliation frequency, vary by state. California, for example, requires a monthly reconciliation. Ask your state commission or a lawyer for the rules that apply to you.
What is the difference between trust accounting and operating accounting?
Operating accounting tracks the management company's own income and costs, such as management fees and payroll. Trust accounting tracks money the company holds for owners and residents. The two use separate bank accounts.
What is a three-way reconciliation?
It is a check that the adjusted bank balance, the trust account book balance, and the total of all owner and resident ledgers are the same number. If one of the three differs, the manager investigates before any money leaves the account.
Can a property manager earn interest on trust funds?
That depends on the state and on the management agreement. Some states allow interest-bearing trust accounts with conditions, and some require the interest to go to the owner or resident. Check your state rules.
Sources and method
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