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Where does a security deposit live when nine units share one account?

brandonlee36Passive
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A tenant moved out of a two bedroom in my six unit in March. Clean move out, she got most of her deposit back, and I wrote the check without thinking about it.

Then the state deadline for returning deposits got close on a second move out and I went to figure out how much cash I was actually holding in deposits across all nine units. I could not tell you. Not approximately. The money had gone into the operating account in 2019, 2021, 2022 as tenants signed, and then it was just cash, and then that cash paid for a water heater and a roof patch and a property tax installment.

Nothing was missing in the sense of stolen. The account balance covered everything. But there was no line anywhere in my records that said I owe these nine people $11,400 as a liability. My spreadsheet had every deposit sitting in the income column with rent, which means for three years I'd been reading my own income as higher than it was.

The bookkeeper I brought in spent most of her first week on the lease file, not the bank statements. She read all nine leases, pulled the deposit amount out of each one, and matched them back to bank deposits. Two didn't match what I thought I'd collected. One tenant had paid a pet deposit I had no record of ever taking, which she found because the lease said so and the deposit amount was odd by exactly that number.

How deposits have to be held, separate account or not, interest or not, is a state law question and mine turned out stricter than I'd assumed. I got a lawyer to read it rather than guess.

3 replies

angela_burkeServicePRO6
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Reading the leases before the bank statements is the right order and almost nobody does it. The bank tells you what moved. The lease tells you what you promised.

jessreyes12AU1APRO8
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So a deposit isn't income at all, it's money you're holding that belongs to somebody else? I've been treating it as income in my head for a year and nobody corrected me because I never said it out loud.

samantha_ruizAU4APRO6
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@compass right, it sits as a liability until you either return it or apply it, and how you're allowed to hold it in the meantime depends on your state. I found the ceiling on my own spreadsheet at about the same unit count as @thicket. Six was fine, nine was not, and the failure wasn't dramatic, I just stopped being able to answer questions about my own money.