Hi Mark and Mat- I’m a huge fan of the show. I could really use some help putting this topic to rest for the members of the property management community.
Every year at tax time, a vigorous debate comes up in the forums among property management company owners about reporting rent received to the IRS.
As property managers, we collect rent throughout the year on behalf of clients, and make regular weekly or monthly distributions to them of the rent that’s collected. Depending on the size of the management company, this can be millions of dollars throughout the course of a year. This money is held in a designated trust account, separate from the management company’s money, and does not belong to the property manager. It is simply held in trust, with the property manager acting as a fiduciary, similar to an attorney or broker holding a client’s funds in escrow.
Every year, someone mentions that their accountant is telling them that they need to claim these funds as income on their property management company’s taxes, and offset it with an expense, which would be the monthly distribution of funds to the owner.
The seasoned property managers do not report any rent on their company tax returns, as it is not income to the property management company. I understand how this can seem uncomfortable to an accountant not familiar with trust accounts and property management, as this is a huge amount of money flowing through the management company that’s not reported on the tax return, but we do account for all of the outgoing money by 1099ing the owners at the end of the year.
Can you please set the record straight? Do client funds need to be accounted for in the property management company’s taxes?