Business bank account for rental income

[bobv4]

Hi, I have a small property that I am renting out and was wondering what type of bank account should the rental income go into? A general checking/savings account or to a business account? From what I understand, the state of California doesn't require a specific account. After reading around online, it seems people definitely establish something like an LLC if they manage multiple properties and collect in a business account, but I wasn't sure if that was overkill for one rental property. Thoughts?

[Mike9241]

two reasons to use a separate account. one is what happens if you are ever audited by the IRS.  it usually easier to satisfy an agent if there's a separate a/c that all the income has been reported and only rental expenses have been deducted. if your personal and rental items are all run through the same a/c an agent could start nitpicking on items.  the second is that it will simplify the work you have to do in reporting the activity on schedule E.  no having to look at a bill to see if is rental or personal. 

as to LLC's some taxpayers put each separate property into its own LLC. what legal protection this provides varies from state to state.

[Carl]

I myself have three rentals, and I can tell you based on my own experience that there's no need to open a business account. It doesn't make sense, because with few exceptions a business account is not free. You have to pay for each transaction you run through that account. Additionally, a business account doesn't pay interest. (ignoring the fact that interest on a savings or checking account is less than 1% these days.)

I myself just have a regular personal checking account that I use only for the rental property. All rental income is deposited to that account, and all rental expenses are paid from that account. I don't use the account for anything else what-so-ever, with no exceptions.

Once a month I'll write a check to myself for my "owner's draw", and that particular transaction is the only one each month that is not tax deductible. All other withdrawals from that account are a rental expense that can be claimed as such on the SCH E.

Having a personal checking account for the rental properties makes tracking all rental income and expenses a breeze, not to mention it makes my life much easier at tax time.

Finally, since it's a "regular" personal checking account, I don't have to pay any BS transaction fees every time I write a check, use the debit card to pay an expense, or deposit a rental payment.

[tagteam]

---

@bobv4 wrote:

Thoughts?

---

Yes - out of all of the steps you can take to protect yourself from personal liability, probably the best step would be to obtain an ample amount of liability insurance.

[Carl]

When I last renewed the insurance for my rental property, the default liability coverage was $300,000. For many that will suffice just fine. But for one of my properties I wanted more. It only cost be $125 extra to up the liability coverage to $1M for the year. Significantly cheaper, easier and much less time consuming than other potential methods to protect my personal assets.

[bobv4]

Thanks a lot Carl, this is exactly what I was looking for. It looks like Chase doesn't have any fees as long as I keep a $2000 balance which would be easy, but I was hoping not to go through the hurdles of creating a business account since I'd need to register a business first. I'll just stick with a checking account

[Carl]

I'll just stick with a checking account

That's my recommendation.

looks like Chase doesn't have any fees as long as I keep a $2000 balance

Now to me, that's a bunch of malarkey and exactly why I don't bank with the big boys. A fee, for the bank to use "your" money? That's ridiculous. I'm with my local credit union where they pay "me" and there is no minimum balance requirement. Well, it's a $5 minimum balance which they call a "membership balance". But I'm not charged anything for going below that - which never ever happens.

For you, when your renter moves out and you have to give that deposit back, then you still have to make the mortgage payment and other expenses while it's empty, you can count on going under $2K quite easily and quickly. Remember the rules - If it can happen, it most certainly will.

Banks and credit unions in my neck of the country almost all offer free checking. Heck, with my credit union even the checks are free in packs of 100 every 6 months. I also have no transaction fees for when I use the debit card.

Overall, I suggest you shop around for the banking needs. Chase is the absolute most costly out there - at least in my area. Down here in FL only the snowbirds use Chase because it's who they were with up north. They don't know any better I guess.

[bobv4]

Thanks for the advice. I'll shop around to find a local credit union with a lower minimum balance like yours.