No matter how many vacation rental properties you oversee, there are a few important things you need to get consistently right in order to be a great vacation rental manager. One of them is trust accounting. In the simplest terms, trust accounting represents a form of bookkeeping for trust accounts. These accounts are special bank accounts that vacation rental managers must maintain to stay in compliance with state laws.
Who Needs Trust Accounting?
While trust accounting regulations are state-specific, many states have a series of rules in common that indicate how funds and transactions must be handled by property management companies.
One of those rules specifies that vacation rental owner funds must be kept in a separate account from your business or personal bank accounts. Not only does this ensure that property owner funds aren’t classified as income to your company; it also ensures the money is available when you need to pay the property owner(s). Depending on your state’s guidelines, you might need to set up a separate trust account for each vacation rental owner or one pooled trust account, where you’ll deposit all property owner funds.
However, this doesn’t mean that you’ll end up handling only one or two accounts. In some situations, vacation rental managers are also required to set up a third account for reserve funds held as part of the management agreement:
- an operating account for their own businesses; this account holds the funds that belong to the property management company and are used to pay for most day-to-day expenses;
- a property management trust account, which handles all the advance deposits paid by prospective guests;
- a reserve fund account, which contains funds that come from property owners and will be used to cover future maintenance and repair costs as well as unexpected expenses.
As a vacation rental manager, it’s essential to know that some states have some very strict trust accounting rules. This aspect is very important especially if you manage vacation rental properties in different states. In New Mexico, for example, vacation rental managers are required to maintain different records, including bank check ledgers, receipts journals, disbursements journals, individual client trust ledgers, client ledger balances, and bank reconciliations, and list property management trust accounts on the check stub.
Trust Accounting Addresses a Wide Range of Challenges
Irrespective of the regulations specific to different states, trust accounting is one of the most difficult vacation rental accounting tasks a property manager must complete. Therefore, we can easily understand why many professionals avoid trust accounting in the states that don’t require short-term rental property managers to maintain trust accounts. However, implementing a trust accounting system brings along a series of benefits, such as:
- It helps you avoid commingling funds – Although different states have different trust accounting rules, under no circumstances should you commingle funds. Commingling of funds typically occurs when vacation rental managers combine property owner funds with their company funds or their own money. In this case, a vacation rental manager may unknowingly use owner funds, which may lead to a lot of mistakes in the management of the company’s finances. For instance, commingling funds may give you a false sense of financial security, as part of the money in your bank account isn’t actually yours. As a result, managing cash and projecting business expenses for seasonal downturns could be more difficult. Additionally, using property owner funds for purposes that they didn’t agree to is illegal and unethical.
- It ensures regulatory compliance – Trying to manage cash inflows and outflows for different vacation rental properties can be frustrating and becomes harder as your business grows. Because vacation rental managers are responsible for maintaining clear records of trust account funds, using a reliable trust accounting system is the only way to ensure full compliance with state laws.
- It protects your fiduciary responsibility – A vacation rental manager stands in a fiduciary role with respect to the beneficiaries of the trust account(s) that he or she handles. Meeting the fiduciary responsibility to property owners and guests alike requires a high level of transparency and accountability that can only be achieved with the help of a trust accounting system.
Even if your state has specific regulations for trust account use, it can be quite tricky for a vacation rental manager who oversees multiple vacation rentals to keep track of all owner funds, advance deposits, refunds, and other transactions. What’s more, the improper handling of these funds may lead to different penalties, fines, and even suspension or revocation of their license.
Although trust accounting provides a series of benefits, maintaining detailed and accurate account records can be a complex, time-consuming task. As well, it can be quite difficult to implement and set up a trust accounting system on your own. Luckily, you don’t have to do any of these things. Nowadays, vacation rental managers can opt for different PMS solutions, which include trust accounting functionality. Since comprehensive lodging management software allows you not only to manage trust accounting in accordance with industry regulations and reconcile different accounts with ease, but also to make timely business decisions. It can help you set your company on a path to success. To find out more about our comprehensive lodging management software solution, we invite you to schedule a live demo today!