Short answer: a property management trust account is reconciled correctly when three numbers agree every month: the adjusted bank balance, the trust account's general ledger balance, and the total of every individual owner and tenant ledger. That is the three-way reconciliation. A sound monthly close also confirms security deposits are fully funded, clears or explains every outstanding item, and keeps the signed reconciliation and support on file so it is ready when an owner, auditor or regulator asks.
Below is what that looks like in practice, the mistakes we see most often when a property management firm grows faster than its back office, and what a monthly close for trust accounts should include. For how we work with property managers, see our property management accounting page.
What is a three-way reconciliation for a property management trust account?
A two-way reconciliation, bank statement against the books, is what most businesses do. Trust money needs one more check. Because the cash in a trust account belongs to owners and tenants, not to the management company, you also have to prove that the ledger total is fully spoken for by individual owner and tenant balances.
- Bank side: the statement balance, plus deposits in transit, minus outstanding checks and payments.
- Book side: the trust account balance in your general ledger or property management software.
- Ledger side: the sum of every owner, tenant and security-deposit sub-ledger.
If all three agree, every dollar in the account is accounted for and assigned to someone. If they don't, you have either a bookkeeping error or a shortfall, and you want to know which before anyone else finds it.
What should a monthly close for trust accounts include?
- A three-way reconciliation for every trust account, operating and security deposit, completed within a few weeks of month-end, reviewed and signed off by someone other than the preparer.
- Outstanding items aged and explained. Checks that have been outstanding for months, unidentified deposits and stale credits get investigated, not carried forward.
- No negative owner ledgers. A negative balance means one owner's money is covering another owner's bills. It should be flagged and funded right away.
- Security deposits fully funded. The deposit account balance should equal the deposit liability on the tenant ledgers.
- Management fees moved on schedule, documented, and only once they are earned, so operating funds never sit in trust and trust funds never sit in operating.
- Owner statements that tie to the same ledger the reconciliation uses, sent on a fixed date each month.
- A clean file: bank statements, the reconciliation report, ledger reports and approvals saved by month.
What do property managers most often get wrong?
Reconciling only to the bank. The bank and the books can agree while individual owner ledgers are wrong. Only the third leg of the reconciliation catches it.
Commingling. Paying a company expense from trust, or depositing management fees and owner funds in the same account, is the classic problem. Trust funds should be in accounts set up for that purpose, and money should move out only for the owner or tenant it belongs to.
Letting reconciliations slide. A reconciliation done three months late takes far longer than three on-time ones, and small differences compound.
Plugging differences. Booking an unexplained variance to a suspense account hides the problem without solving it.
Trust accounting rules are set state by state, usually by the real estate commission, and they differ on timing, record-keeping and who may sign. Check the rules where you operate; the close above is the accounting discipline that sits under any of them.
When does it make sense to get outside help?
When the person doing the reconciliations is also the person moving the money, when reconciliations are more than a month behind, or when your portfolio has grown to more owners and accounts than one in-house bookkeeper can review carefully. An outside team adds separation of duties and a fixed close calendar, and frees your staff to run properties.
River Edge Advisors has 75+ staff and works with property managers, owners and operators nationwide. We reconcile trust and operating accounts every month, tie owner statements to the ledger, and close on a fixed date. More on our real estate accounting work, or read how we approach the property management month-end close. If you'd like a second set of eyes, we're happy to review last month's books for free.
Common questions
How often should a property management trust account be reconciled?
At least monthly, and soon after the bank statement arrives. Many states set their own deadline, so check your state's real estate commission rules; monthly is the practical minimum for any firm.
What is the difference between a two-way and a three-way reconciliation?
A two-way reconciliation matches the bank statement to the books. A three-way reconciliation adds a third check: the total of all individual owner and tenant ledgers must equal both of those numbers.
What does a negative owner ledger mean?
It means the owner's property has paid out more than it has taken in, so other owners' money in the trust account is covering it. It should be flagged and funded right away.
Can management fees stay in the trust account?
Fees should be moved to the operating account once they are earned and documented. Leaving company money in trust, or trust money in operating, is commingling.
Can an outsourced accountant reconcile trust accounts for a firm outside New York?
Yes. River Edge is based in Cedarhurst, New York, and works with property managers nationwide; the work happens in your property management and accounting software, wherever your properties are.