Interest-bearing security deposits

[J Adams]

I have looked into the subject of interest-bearing security deposits and I have a few questions about the setup. So in California there is no law that requires this. I am asking because I view it as a benefit to the tenant and therefore a way to attract high-quality tenants. 

The chief among them is the definition of "separate". Yes, I do understand that you want to separate business checking from personal checking. This is the whole reason for limited liability. However, when talking about these security deposits does separate mean each unit, each door, has it's own account or does separate mean an account that only security deposits dump into and paid out from? Depending on this answer raises the complexity. If the former and you are an apartment complex owner you could be looking at managing hundreds of accounts. If the latter how do you keep track of the interest? Continuing on, how are these accounts held? Be that a separate individual escrow account in their name, in the company's name under a For Benefit Of (FBO), or a bank account "in trust" of the tenant. These affect the taxation of the account as well I believe. Take for example the company holds the money and is issued a 1099-INT for the interest. Does the company pay the tax or can that be passed through to the tenant. 

I do understand that YMMV, that only a lawyer can answer these, but this could also be a jumping off point for anybody else interested in this topic as the rest of the Internet is pretty lacking. Thank you!

[Alan G.]

Jay,

You absolutely do not need individual accounts. I have 1 escrow account that all tenants security deposits go into. (I have over 40 units). I use quick books to track it just like all of my other accounts. In the state of Pennsylvania, by law , we are supposed to give back the tenant interest earned on there money, minus a fee for us to track it. However, banks are paying such a minimum interest rate that that fee could be more that the interest earned. So we never pay it. You are overthinking this. Just keep all security deposits separate from operating account and keep track of how much each tenant has given you and you will be fine.

If a tenant moves and of course there are no charges for damage, we write a check directly from that escrow account back to the tenant. If a tenant moves and there are charges , some money may go to tenant from that account and the balance would go to our operating account for that unit and treated as income.

Hope this helps.