Tax Handling of Property Management Reserve Account?

[Mehran K.]

Quick question for the tax professionals :)

From the collected rent on my duplex (June), I've allowed the property manager to hold $500 as reserves for future expenses/improvements etc.

Hypothetically (because I'm know expenses will come up), let's say there are no expenses this year, leaving the $500 untouched. Would this amount be handled any different from the rest of my gross income for the year? Just want to clarify because my PM listed it as an expense in her monthly report.

Thanks in Advance!

[Dave Toelkes]

Your property manager holds $500 of your money on deposit to pay future maintenance bills as they come up. This is no different from the escrow account that your lender has to pay future property tax bills and hazard insurance premiums.

In either case, the amount held by your lender or your property manager is a deposit that is refunded to you if you close your account. The amount held on deposit is not a deductible expense nor is it treated as taxable income. It is just an escrow deposit.

As an escrow deposit, it does not reduce your gross income, nor increase your expenses. You will want to account for the deposits in your accounting system, but, there is no tax treatment to be concerned with until a bill is paid from funds held in the escrow account.

One way to do this in your accounting system is to set up a property management account for your property. Rents collected by the property manager are deposited into the property management account. Bills paid by the property manager and the management fee are deducted (withdrawn) from the property management account. At the end of the month, the property manager issues you a check for the net rental proceeds which you expense to the property management account (just as you would any other bill), and credit your own checking account for the amount of the check (as a deposit). The amount left over in the property management account should be the $500 that your manager retains for emergency repairs.

Just my 2 cents