efficient track of money in BAH: how many business accounts and which ones

21 Replies

Hey guys,
we are BAH (buy-and-hold) property owners that just separated our business account from personal.
To efficiently operate rentals, what business accounts would you recommend to have? Would you recommend:
-a small business CREDIT CARD on top of a small business CHECKING account (all the rental income?
-SAVINGS account to put away 10% of the rental income form CHECKING acct for future maintenance expenses?
-separate SAVINGS account for tenant's DEPOSIT or just put the tenants deposit to the SAVINGS account receiving 10% of rental income?
I just want to simplify tracking of income/expense.

It seems to me just one checking account (income from properties and expenses associated with properties) would be easier to track rather than checking acct AND a small biz credit card. In the same time do not want to miss out on the perks of a small business credit card.
PLease, advise ;)))
Thank you!

As a real estate business owner, you keep books for two reasons. 1) so you can see the profitability of each property or deal or investment, etc. 2) for tax purposes. The IRS has a big problem when a "business owner" is using their personal account for both personal and business stuff. In an audit, it gets very messy because the IRS wants to count every deposit as taxable income and every payment/withdrawal as a non-tax deduction.

You are making the right move by opening a business account. If you like using a credit card, I would recommend either having a personal card designated as your business card used solely for business expenses or get a small business card and of course use it exclusively for the business. Adding one credit card isn't that much extra work to keep track of your expenses.

As far as savings accounts, that is more a personal preference and depends on your goals. If your goal is to take 10% of your profits and re-invest it, then I could see it being a good idea to transfer that money out to a seperate account until you are ready to invest it.

I wouldn't worry about the tenant deposits. I would claim it as income in the year you get it and then expense it when you pay it out.

Hope this helps.

I have a checking account for rental income and expenses and an account for security deposits. You do not claim deposits as income when you receive it. While having separate bank accounts for your business and personal finances is a good idea and may help at tax time, it is not a substitute for good bookkeeping. I also have several credit cards for my rentals (Menards, Lowe's, and Home Depot).

I am about to open a third account for my rentals because I am in the process of getting a cash out refi mortgage and the IRS requires keeping the proceeds of the loan separate and tracking them in order to deduct the interest.

From personal experience as a CPA dealing with the IRS, unless your tenant agreement/rental contract is iron clad, the IRS will make you claim the deposits as income. So i would be careful @Kyle Meyers . I know proper accounting rules allow you to claim the the renters deposit as a liability. (Regardless if you have a seperate account setup for it or not). IRS will find a way. It's better to just claim it as income when you get it and claim it as an expense when you pay it out. (Or you can pray you don't get audited which is never a good strategy in my mind.)

@John Briggs

The IRS does not want security deposits to be included as income when received unless you plan on keeping the deposit.

"Security deposits. Do not include a security deposit in your income when you receive it if you plan to return it to your tenant at the end of the lease. But if you keep part or all of the security deposit during any year because your tenant does not live up to the terms of the lease, include the amount you keep in your income in that year.

If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. Include it in your income when you receive it. "


I can't wait for accountants like Charles Perkins and @Steven Hamilton to chime in, and maybe Dave T (he self-proclaims himself to be a "tax nerd" - and I agree he knows that topic better than many accountants) will take a chance to speak up ...

@Kyle Meyers - I agree with you BTW ...

@Kyle Meyers WOW, what a great info!!! Thanks!!! I will use this info to open an "escrow acct" for security deposits. Thanks for sharing :)))


How many accounts you have or need somewhat depends upon your bookkeeping system and your cash management practice.

For your tenant's security deposits, you may be required by law to keep security deposits in a separate "escrow" account and may even be required to pay interest on your tenant's security deposits. This is a matter of state law, and may vary state to state, so check your local landlord tenant law.

Good business practice suggests that you keep your personal funds separate from your business funds, and do your accounting accordingly. For my own rental activities, I have two banking accounts -- a checking account for my rental operations and a savings account for my reserve funds and annual property taxes.

All of my properties are professionally managed so I depend upon the property managers to keep the escrow accounts for tenant's security deposits. If I did not use professional property managers, then I would have a separate savings account just for the security deposits.

The property managers direct deposit rent proceeeds into my checking account each month. I pay bills and mortgage payments from the checking account. I transfer a fixed amount of excess funds each month from the checking account to the savings account to cover property taxes and major systems replacements as they occur.

For your bookkeeping system, you may need a checking account, a savings account, a property manager deposit account for each property (even if you self-manage), an escrow account for each financed property, an asset account for each property, a liability account for each mortgage loan, and if you decide to use a credit card, you will need an account in your bookkepping system to track your credit card charges. Many on these forums suggest Quickbooks for your rental activity bookkeeping software. I use Quicken Rental Property Manager and have found it quite adequate.

Dave T I LOVE your system! We do have a property management, and what you just described was what I planned to incorporate. Your system is similar to @Kyle Meyers .

My bookkeeping is organized by suggestion of Arthur Garcia, one of BP bloggers. I really liked his article, and with a few modifications I created my bookkeeping system. Here's the article:

Dave T has a good accounting system in place. It is extremely important to know your state's laws regarding security deposits. Many times you are required to keep an escrow account for each tenant.

Keeping your personal accounts separate from business accounts is a wise idea. If you commingle funds it is quite possible you will lose some of your deductions because you have a harder time showing it wasn't for personal purposes.

You can certainly run all of your rental activity through one account as long as you separately account for each of your rental properties.

@John Briggs is quite right though that the IRS may claim your security deposit is income at the time you collect it. As landlords we do all we can to reduce any potential loss when a tenant leaves. Which means that at least a portion if not all of the deposit will not be returned in the future. This fact and the fact the vast majority of investors use the cash method of accounting means that you will have a hard time convincing an IRS agent that a security deposit is not income when received. For accounting purposes the security deposit is a liability but for tax purposes generally you want to treat as income and claim the expense when the tenant moves out.

Charles Perkins - Here is how I handle security deposits; I'd like to hear your opinion as to whether doing what I do causes the deposit to be income.

I avoid getting "last month's rent" as a deposit, since that will be income. If I do get that money, I want it as a separate payment (if collecting cash, I issue a separate receipt).

I have the tenant fill out a W9 form when they sign the first lease, since the bank's require this to open an account.

I open an account attached to the tenant's SSN, with myself as landlord / escrow agent / whatever the bank term happens to be (each bank can use something different). The amount of the security is deposited into this new account; some banks are doing these as sub-accounts of a master account, but I have not done that yet (looking into it for the future).

So now that security deposit money is always kept separate, and any interest that this money receives gets credited to the tenant's SSN. And when interest rates were higher, bigger deposits actually generated over $10 in annual interest leading to a 1099INT being sent to the tenant.

That is pretty much it - so how could the IRS declare that deposit money as part of my income? And if the IRS did so, what would be their justification?

@Steve Babiak Interesting! As a tenant I never filled out any W-9 forms to rent a place... And I have had about 7 apartments in my life... How do your tenants react to it, Steve? Do they look surprised or worried, or do they just fill it out with no questions?

@Steve Babiak you have some elaborate deposit requirements in Pennsylvania. In Oregon there are no special requirements to set-up special accounts therefore have always claimed all deposits as income and refunds as expenses. It is just a matter of simpler bookkeeping.

PA landlord tenant law requires that tenant security deposits are kept separate; some landlords try to get around that by putting a clause in the lease saying the tenant allows the landlord to keep the money in the landlord's own account, but the landlord tenant law also prohibits lease clauses that have the tenant agreeing to waive this security deposit requirement. So I keep them separate.

Never had a problem getting a tenant to complete the W9 to date. I simply tell them the truth, that I have to open a bank account to hold the security deposit, and the bank won't open that account without a completed W9. Getting it done when the lease is signed saves having to run around to try and get it signed down the road, and they're in a signing mood already anyway.

Now, I have encountered contractors that refuse to complete a W9 (I need that to send them a 1099MISC in January), but I end up avoiding doing business with those - contractors who work with investors KNOW that they will be asked to fill out a W9 at some point if the job is $600 or more.

That's interesting Steve, what is not clear is the signature authority on any sub account or joint account, I suspect you have the ability to make withdrawls alone, if it requires both, the money could be hard to get to.

While it's interesting, I wouldn't go there. Accounts can be frozen and siezed under several events effecting your tenant and done so without your consent or knowledge. Read your sub account agreements with the bank carefully, the right of set off, a judgment being collected may have the ability flow to the master account. Co-mingling funds in a bank account can be a problem as the master account holder has the ultimate liability.

It may be that the op is exempt from escrow requirements if the property is personally held and on a cash basis, you'll be reconizing deposits as income deposited in your general account.

If the property is in a business, you will likely be required to have an escrow account. You do not need seperate bank accounts, just one bank account designated as escrow. Interest might not be paid by your bank on any escrow account, if interest is paid the party due the interest may be dictated by state law, however, it can usually be agreed to, I always received the interest for the maintenance of the account. The seperate escrow accounts for each tenant on on your books, an account for each tenant.

To keep the IRS from attaching deposits as income you need to have a seperate escrow account and agreement limiting your access to funds only upon certain occurrances and showing such funds as a liability. State law governs the acceptance, use and management of escrow accounts, keeping the escrow away from being rents the lease agreement may reference the escrow as a performance guarantee/escrow agreement. Such funds then only become available upon future occurances and while you may have custody, you don't have control.

An accrual system would be a real pain, IMO, for a landlord and as Charles suggested a cash basis would be better.

An escrow account should be cleraly identified on your books and care taken to ensure no accounting entries are made with any sub accounts other than deposits and disbursements applied to each tenant, it's not your money. Some accounting errors could constitute the co-mingling of funds for a business entity. It's always a liability until an indemnification (loss is covered) with amounts assigned to your income or appropriate accounts. For example, if a tenant is required to keep a renter's policy, amounts might be used for premiums and the disbursement made directly to the insurance company, not you, avoiding the income issues. You would then make a demand for the escrow account to be brought current by that tenant, all being covered in your escrow agreement.

If interest is paid on any escrow account and it becomes your income:

Small amounts that do not exceed the cost of maintenance and bank fees, if any, may be allowed to be kept in the account. As interest exceeds the accounts expenses, it become income to you. That needs to be withdrawn immediately as allowing interest to accumulate in an escrow account is basically allowing your buisness income being kept in the escrow account, poisining the fruit co-mingling your money with escrowed funds. Several years ago, this was a big issue with the department of finance in Mo and generated alot of revenues from fines. So, don't ignore your escrow account!

Besides your escrow account, one checking account should do you just fine, move money as you like from that account.

A small business credit card comes in handy at the gas pump! American Express seems to issue more cards, but what ever you get, keep life simple and never use it for personal use, your statements are good source documents for you accountant and the tax man. :)

Originally posted by Bill Gulley:
That's interesting Steve, what is not clear is the signature authority on any sub account or joint account, I suspect you have the ability to make withdrawls alone, if it requires both, the money could be hard to get to.


These accounts are set up so that the tenant has no access to the funds, they just get the annual 1099INT if any is issued. In one bank that I am using, the funds are "on hold" so that I can't even get to them without sitting with a bank rep and having that rep remove the hold - I have to show ID and sign for the withdrawal. But I can withdraw at any time. Usually there is only a withdrawal when the account is closed - tenant moves out.

Also, as rents increase, security deposits are allowed to also increase by law in my state, so when I collect separate funds from the tenant for the raised deposit I can then make a deposit for the escrow account and put those funds into the existing escrow.

Our setup in NC (based on NC tenant deposit law) is similar to Steve's, although our company doesn't have interest payments to the tenant (no W-9 needed). Accounts wise, I thing the OP got the answer. And for those (crazy) people who want to put each (SFR) property in their own LLC, multiply the number of accounts by your LLC count to get the number of total accounts you will need to manage.

A quote from IRS Topic 414

Most individuals operate on a cash basis, which means they count their rental income as income when it is actually or constructively received, and deduct their expenses as they are paid. Some specific types of income are:

Amounts paid to cancel a lease– If a tenant pays you to cancel a lease, this money is also rental income and is reported in the year you receive it.

Advance rent– Generally you include any advance rent paid in income in the year you receive it regardless of the period covered or the method of accounting you use.

Security deposits– Do not include a security deposit in your income if you may be required to return it to the tenant at the end of the lease. But if you keep part or all of the security deposit during any year because the tenant damaged the property or did not live up to the terms of the lease, this money is taxable income in the year this determination is made. If the security deposit is to be used as the tenant's final month's rent, you include the money as income when you receive it, rather than when you apply it to the last month's rent.


Originally posted by Charles Perkins:

Originally posted by A quote from IRS Topic 414:


Security deposits– Do not include a security deposit in your income if you may be required to return it to the tenant at the end of the lease. But if you keep part or all of the security deposit during any year because the tenant damaged the property or did not live up to the terms of the lease, this money is taxable income in the year this determination is made. If the security deposit is to be used as the tenant's final month's rent, you include the money as income when you receive it, rather than when you apply it to the last month's rent.


Charles - I emboldened the key statement there: It only becomes income in the year that you withdraw from that security deposit is how I read that. So when I take deductions from the security deposit at the end of the lease, I call it income then.

How else can you interpret that statement?

Actually there is more to the story. Many add listed charges like $300 will be charged for cleaning. How the rental agreement is written up makes a difference. Also auditors often reclass security deposits as advanced rent payments again it makes a difference how the lease is written up.

My system is very old school. I own 9 properties and each has it's own checking account and binder. In each binder I keep sections for taxes, insurance, Section 8 communications, and HOA info (if needed). I use pocket dividers for each year and record all expenses in a running column paper inside. Then I insert all receipts - and any other paperwork that has to do with that rental property that year. My PM keeps the deposit. I put the checkbook in the front pocket and I also put a set of extra keys in an envelope in the front pocket.

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