BiggerPockets

Hi all

I'm closing on my first property today a 3-family unit. I was wondering if I should set up another personal bank account for all activities. I'm going to be depositing my checks and if there are repairs I'm going to take it out of this account.

I will also be paying the mortgage from this account and if I am short, I'm going to transfer money from another account.

Is this a good idea and what does everyone do? I'm just starting out. Thanks

Create a business, and have a separate bank account for that business. Create a business! Create a business! Create a business!

Did I say that enough? I chose a LLC myself for my rental properties. Getting sued isn't worth it. You should also get liability insurance.

Another thing to consider is the handling of the security deposits that were funded by the tenants. Your state and local law may have some mandates that you must follow regarding treatment of those funds. If there are no such rules in your area, I still recommend a separate escrow account for each tenant's security deposit; there are some banks that have "master" escrow accounts that allow for each tenant to be a "sub-account" under the master - this is also a good way (maybe even better if you scale up in size).

Hi as Steve and Jason pointed out it is very important to keep funds seperate.

You will need an escrow account, if it's required by law, your account will need to be titled XYZ ESCROW ACCOUNT, if not so required, it can be any account but ONLY deposits and funds held in trust should ever be depoisited to this account and any withdrawl should be well noted on the check and on your books.

If you comingle you accounts and you need paper towels to clean units, the IRS can simply disallow your deduction saying it was used at home since it was paid from a personal account or one of comingled funds.

I too would suggest you formalize a business entity, an LLC probably. You need to have a chat with an accountant and probably an attorney. Good luck, Bill

Originally posted by Steve Babiak:

Originally posted by S Yu:
... Damn all these bank accounts...

You're saying that today because you don't look forward to the management of those accounts, but later on you will be thankful that you did create the separate accounts and did not commingle any funds (personal vs rental income vs security deposits in escrow).

Last time I counted, I had 23 business bank accounts, and while it can sometimes be a pain in the butt (for example, I have about 11 different checkbooks), at the end of the year, it makes accounting much, much easier...

Yea, I will be opening a separate account for depositing this. I already have one for their security deposit. I need to create another one for the rental income/expenses. I will have to have a chat with an accountant/lawyer to see how best approach this.

Right now I am just going to open a personal checking account just for rental income/expenses.

If your just getting started you may not be aware of the many advantages of being in business rather than just being an investor.

Businesses enjoy greater tax advantages not available to someone that is just an investor.

Businesses can offer asset protection.

Businesses open retirement opportunities that are not possible as an individual.

This is only a start. When I think about the many good reasons for being in business things like separating my business from my personal transactions don't seem to matter to much. You'll be very happy you did if your ever audited.

An investor will find that the IRS will dig into everyone of their bank accounts to determine the source of each deposit. If you can show that you have separated your activity an IRS agent is less likely to do this. If the business entity is a corporate or partnership entity they will have no reason to look at personal bank accounts for business activity.