This post is by special request from a Nevada Real Estate Broker in Las Vegas who tells me that, when he attended a mandatory prelicensing class for Property Management, the instructor didn’t fully cover this issue. He is not alone. I’ve heard the same from other Property Management Permit holders. It seems there are quite a few brokers and property managers who are unsure what the Nevada Real Estate Division is looking for, in terms of the annual Trust Account Reconciliation. We’ll review the basics here, and then I would urge you to submit your comments and questions as a reply to this post, so that we can openly share some of the common misconceptions about this area of Nevada Real Estate Law.
First Things First
If you handle other people’s money, whether for property management or any other real estate purpose, you are required to have a Trust Account. Whether the broker is actually the Property Manager, or not, the broker is the responsible party for the trust account(s). Since the broker is ultimately responsible for everything that goes on with the trust account(s), this post is addressed primarily to Nevada real estate brokers. However, if you are the Designated Property Manager for your firm, please bookmark this post and share it with your broker.
If your company is involved in managing property for others, whether residential or commercial property, and you handle the money of owner-clients and/or tenants, you’re going to be required to have a minimum of two separate trust accounts – one for owners’ money, and one for tenants’ money (security deposits). This means that, every year, you’re going to be reporting on both of these accounts to the Nevada Real Estate Division.
When is the report due?
The annual Trust Account Reconciliation report is due on the anniversary date of the broker’s license renewal. In other words, whether the broker’s license is due to renew in 2 years or 4 years, the trust account reconciliations are due to the Division every single year on the anniversary of the broker’s license renewal date.
What period should the reconciliation report cover?
The Trust Account Reconciliation report should cover the calendar month immediately preceding the broker’s license renewal date. Example:
Broker’s License Renews: June 30, 2013
Trust Account Reconciliation(s) Next Due: June 30, 2012
Period Covered in the Next Report: May 1 through May 31, 2012.
What does the report consist of?
The report is essentially a comparison of what the broker’s trust accounting records show, and what the bank statement shows. Let’s take a look at the report, section by section:
The first part’s easy, right? Just your basic office/brokerage information, and the banking information on your trust account. Remember that, if you’re reporting on more than one trust account, each account must be reported on a separate form. Up at the top where you see check boxes for “Custodial” or “Trust” accounts, in most cases, you’re going to check “Trust Account.” A Custodial Account is an account that is established in the client’s name (or property’s name – for a single property), and to which the owner/client has full access. If the client is not a signer on your account, it’s going to be considered a Trust Account. Either way, the report contents will be the same.
This first part of the report is a very simple reconciliation form. Using our example from above, where we’re reporting on the month of May, 2012, the first line of Part I is going to show the “ending balance” as reported on your bank statement as of May 31, 2012. (Don’t forget to attach a copy of your bank statement to the report.) The next line will show the total of any deposits to the trust account that were recorded on your books for May, but are not reflected on the bank statement. (Perhaps, you made a deposit after the bank’s normal business hours on May 31st, and it was not credited to your trust account until June 1.) The next line is a subtotal line, adding the two previous amounts together.
Any checks you’ve issued that have not cleared the bank by May 31 are going to be listed (in total) on the following line.
As for “Adjusting Entries,” I’m hoping this line is zero on your report. You really shouldn’t have any adjustments to your reconciliation, right? Your accounting software likely gives you the ability to record any bank fees in the month they’re charged which would change your ending balance accordingly. So, no “Adjusting Entries” would be needed in that case. Let me just say this… if I were a Nevada Real Estate Division Compliance Officer, and I were reviewing your trust account reports, I’d probably look first for “Adjusting Entries.” In “old school” bookkeeping lingo, we’d call those entries “force balancing.”
The last line of Part I of the report is simply the reconciled ending balance of your trust account (as of May 31, 2012), after adding deposits not appearing on the bank statement and subtracting checks that haven’t cleared the bank. It will not be the same number as the bank statement ending balance, unless you have no outstanding checks and no un-credited deposits. So far, so good. Let’s look at the next section:
The “as of” date that goes here in Part II is May 31, 2012 – all the amounts you’re showing on this report are as of the last day of the month on which you’re reporting. The “total” line in Part II is going to be what your accounting records show as the ‘grand total’ of all money in that trust account as of May 31, 2012. If you’re doing this correctly, that number is going to match the last line of Part I.
Part III is simply a breakdown of your individual property ledgers. So, rather than the balance sheet total for the trust account, the number that appears in this section is the total of the property ledgers, all added together. Your software will do this for you, and you can probably run a “property totals” report, or something similar that lists each property and its cash balance as of the report date (May 31.) Again, the “as of” date, in our example, will be May 31, 2012. If you’ve done this part correctly, the total between Parts I, II, and III will all be the same! The broker signs at the bottom of this section.
The schedules appear on the second page of the report. Just as they indicate, this is where you will individually list any outstanding checks or un-credited deposits. Remember, on the first page you listed totals for these categories. Here is where you’ll list the individual deposit(s) that is/are outstanding, and the individual uncleared checks.
As you might guess, “Schedule C” is where you’re going to list any “adjustments” you made on the first page. Naturally, you’re not going to have any of those, right?
Lastly, each of your individual property ledgers, with their corresponding balances (“as of” date remains the same, throughout) are all listed on Schedule D. As is indicated on the form, you may make as many copies of the Schedule page as you need to, to accommodate the number of properties comprising your trust account.
That wasn’t so tough!
Am I right? It’s really easier than it looks. If you run into problems, don’t hesitate to email me with your questions. And, for those of you who have had some confusion about this requirement, I hope this post helps! Oh! One last thing… The Nevada Real Estate Division has published a guide to help you with all things “trust accounting.” You can download that publication here.
Please remember to post your comments and questions so I can follow up if there are issues I didn’t fully address in this blog. Thanks for reading!