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QUESTION - I'm looking for a name I can associate with this specific type of accounting practice and whether this would be considered good accounting, bad accounting, doesn't matter, depends, etc?

Scenario - There are 2 owners of a residential building, the rents come in, bills come in, etc, etc. After all fees, bills, etc. are paid there is a specific amount left over, but instead of paying out the remaining balance to each owner, only a percentage or flat amount is paid out to the owners leaving the remaining amount in the account.

Ex. $20K in rents come in and $5K in bills are paid leaving $15K to pay out to the 2 owners. Now instead of paying each owner $7.5K each, each owner gets $5K each, which leaves $5K in the account. This left over amount slowly builds ups or accrues over time.

Additional Info - If one or more tenants do not pay rent on time or miss a month, then what the manager does is payout the flat amount (ex. $5K) regardless of the amount that has come in for the month and pulls the difference needed from what's been saved/accrued from previous months, if less than $10K, to get to the flat rate of $5K.

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  • A 'savings account'?
    – Aganju
    Jun 9, 2022 at 4:12
  • I guess, does it matter? Jun 9, 2022 at 4:20
  • I mean it's called a 'joint savings account' or 'joint checking account'. It's only 'special' in their minds - it's simply a joint account they decided to use this way.
    – Aganju
    Jun 9, 2022 at 4:23
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    You are asking for trouble to have this amount of money flowing through without a written agreement. As indicated in a comment to the answer already provided, a partnership implicitly exists even without written documentation, but if someone gets upset at something in the operation, resolving the dispute will be a nightmare. Get a lawyer and ask for their advice on how to proceed, in writing. Jun 9, 2022 at 17:01
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    The tax situation can also become dicey if the recordkeeping is poor. I can't stress enough - get an agreement in writing and find professional advice that can assist in the planning + the tax filings. Seriously. 3 families invested in a rental property with lopsided ownership %'s and different allocation of management work, with no written agreement???? Jun 9, 2022 at 17:02

1 Answer 1

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This is called "guaranteed payments" in partnership accounting. Guaranteed payments are usually used in lieu of salary to partners (partners are not employees of the partnership and cannot draw salary). Usually the payments are conditioned on performance (as salaries usually are).

In your setup, your partners get guaranteed payments even though they provide no work, and the partnership may or may not receive any income. So this is a bit weird as a setup. For example - what happens if you exhaust your stash? Will the partnership still be on the hook for the payments?

In investment partnerships you usually would not see guaranteed payments. Instead, the operation agreement would stipulate the portions of the partnership income to be attributed (not necessarily distributed) to each partner.

If your setup is a corporation instead of a partnership, it becomes even more complicated. There are questions of retained earnings, salaries, dividends, etc. Generally you wouldn't want to set up a corporation for a real estate investment.

Talk to a lawyer and an accountant on how to better set this up.

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  • Thanks for the info. Currently there is no partnership. This is a building that is owned by 3 families. 50/25/25 and one of the families is acting as the manager and this is how payments are sent out to the owners each month. Just wondering if this should be changed? Is there a better option, like just paying out all the revenue that comes in every month, but maybe keeping a small floating balance for unaccounted for costs? If I wanted to ask for our families share (50%) out of the account, how would that work? Is it going to get confusing, messy, etc? Jun 9, 2022 at 6:36
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    @questionwonderer there's a partnership. If there's no other organization, then it is a partnership. Whether you have a proper operating agreement and are properly managing the books and finances is a different question. I'd suggest talking to an attorney, since this can get very messy
    – littleadv
    Jun 9, 2022 at 6:40
  • ok, thanks for the help. Jun 9, 2022 at 6:56

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