Why Trust Accounting Is Crucial for Vacation Rentals
Updated: Jan 27, 2022
Trust accounting is one of the most important parts of vacation rental property management. But for many property managers, trust accounting is also one of the biggest sources of confusion and stress. This is particularly true for the newbies who aren’t familiar with the applicable rules and regulations.
Assessing the Role of Trust Accounts
Trust accounts are required in industries where specific businesses hold funds that belong to their clients. To better understand the role of trust accounts in property management, here is how they work:
When booking one of the vacation rental properties you manage, prospective guests make an advance deposit, which is usually paid by credit card or electronic check. As the property manager, you may also be responsible for charging the guests asecurity deposit when they check-in and collecting the remaining balance upon check-out.
Depending on your state guidelines, you may be required to deposit the funds you collect from guests into a trust account. While some states don’t have any rules and regulations pertaining to the management and utilization of trust accounts, others require property management companies to set up a pooled trust account or a separate trust account for each individual property owner. If trust accounts aren’t required in your state, it’s up to you to decide whether opening and maintaining one or more trust accounts will benefit your business or not.
Once you deposit funds into a trust account that you have specifically opened for a property owner, you can electronically transfer money or write checks to cover the operating expenses associated with his or hervacation rental(s). If you have opened a pooled trust account, you can use the funds to pay the fees and expenses related to all the properties you manage, irrespective of whether there is only one or multiple property owners.
After paying property-related expenses, you need to transfer the remaining trust amount to the property owner(s) according to the terms and conditions of the trust agreement(s).
The Key Benefits of Using Trust Accounts
Even in the states where trust accounting isn’t required by law, opening at least one trust account can deliver some undeniable benefits. These include:
Better financial management – Keeping property owners’ money separate from your personal and business funds will allow you to monitor and plan your financial resources more accurately. In short, by maintaining complete records of trust account funds, you know exactly how much of the total balance belongs to you and to each property owner. Additionally, trust accounting can simplify a series of accounting tasks, including bookkeeping and month-end processing.
Regulatory compliance – Trust accounting can help with legal and operational compliance. Compliance basically means having an adequate system in place to maintain accurate records. Throughbank reconciliation, which is one of the main goals of trust accounting, you can easily confirm that your records are complete and free of errors or omissions. By reconciling bank statements with your in-house record-keeping systems monthly, you will identify mistakes, such as wrong amounts and duplicate entries.
A lower risk of commingling funds – When you hold your own money or your company’s funds in the same account that is holding property owners’ funds, you may end up using their money for other reasons that are lawful and appropriate. For instance, you may use one property owner’s funds for another owner’s property. Or you may accidentally use property owners’ funds to pay for expenses related to your business. Keeping property owners’ funds separately from your own company’s money will help you avoid serious financial risks and legal problems.
FDIC Protection –FDIC insurance is one of the most important benefits of opening a business account with an FDIC-insured bank. One important consideration is that the business accounts under the same tax ID are collectively insured up to $250,000. Conversely, the trust accounts with multiple beneficiaries are separately covered by the FDIC. That means every beneficiary is protected up to $250,000. As well, unlike regular business accounts, trust accounts aren’t subject to an account freeze, which could happen due to suspicious activity or liens filed against your business.
Good reputation– When held in trust accounts, property owners’ funds are properly handled, insured, and protected from potential problems that may hurt your business finances. Besides giving you peace of mind, keeping property owners’ funds safe adds to your overall professionalism and reputation.
When it comes to trust accounting, the rules, regulations, and customary practices can vary widely among states. While getting familiar with your state laws is imperative to ensure regulatory compliance, opting for alodging management system with trust accounting functionality can be an extremely helpful tool for you to stay compliant with trust accounting rules. Besides allowing you to properly manage trust accounts, our PMS solution can help you complete many other accounting tasks and streamline a wide variety of business operations. If you’re looking for a way to simplify vacation rental property management, contact us today byfilling out our contact form!