All real estate brokers and salesmen should be aware that it is a violation of the License Law and the Real Estate Commission's Rules to deposit funds received from others in a real estate transaction (earnest money, tenant security deposits, rents, etc.) in a bank account other than a properly designated "trust" or "escrow" account. When "trust funds" are mixed with other funds, they are said to be commingled.
Typically, commingling involves a broker placing an earnest money deposit or some other form of trust money in his business or personal account. However, the Commission's Trust Account Auditors have discovered an increasing incidence of another form of commingling, sometimes referred to as "reverse commingling", whereby earned commissions (i.e., the broker's monies) are left in the broker's trust account long after the transaction has been closed. Consequently, the broker's monies are commingled with that of his/her clients.
The Commission's auditors report that this practice is especially prevalent in firms which engage in property management as a sideline to their other regular day to day sales activities, where the income from property management is considered a supplement to their primary income rather than a necessity for financial survival. They retain earned commissions from their rental activities in their trust account primarily as a hedge against bounced checks from their trust or escrow accounts. According to the auditors, these firms believe that it is better to have too much money in their trust accounts than not enough. They state, "If my tenant gives me a bad check and my trust account checks begin to bounce, then I am certain to draw unwanted attention from the Real Estate Commission." Although these brokers may be well motivated, nevertheless, failure to promptly remove earned commissions and fees from a trust account creates several problems.
First of all, as already discussed, it constitutes a commingling of trust funds with "non-trust" funds which can result in disciplinary action by the Real Estate Commission.
Secondly, the IRS prefers to have income reported in the calendar year that it is earned. If a real estate agent is audited by the IRS and the audit determines that earned commissions (the agent's funds) are left in the trust or escrow account, then the legitimacy of the trust account might be called into question and the account "frozen."
Finally, overages in a trust account can hide a multitude of sins. Consider the case, for example, where a bookkeeper or secretary for a real estate firm fails to deposit cash receipts for rents or security deposits. However, because the broker cushions the account by leaving in his/her rental commissions, he finds out when he attempts to withdraw his commissions that there are not only insufficient funds in the account to pay his commissions, but that additional funds are frequently required in order to cover the shortage. Several firms have encountered this problem in recent months.
CAVEAT: Brokerage fees (when earned) should be disbursed promptly (within 30 days) from the broker's trust account to his/her general operating account, with each commission check clearly indicating the specific transaction to which it applies.