What Is "Commingling" in California Real Estate?

The Fastest Way to Lose Your License

Imagine this scenario: You are a broker with a busy property management division. A tenant hands you a security deposit check for $2,000. You’re in a rush, so you deposit it into your general business operating account, intending to transfer it to the trust account on Monday.

Even if you transfer the money on Monday morning, you have already broken the law.

In California real estate, that mistake has a name: commingling of trust funds – illegally mixing a client’s money with your own.

Mishandling of trust funds is one of the most common reasons the California Department of Real Estate (DRE) disciplines licensees.

This article is part of our California Real Estate Laws & Compliance Guide, designed to keep you safe, compliant, and in business. Let’s break down exactly what commingling is, how it differs from conversion, and how you can avoid the audit nightmares that end careers.

What Is Commingling in California Real Estate?

In California real estate, commingling is the illegal practice of mixing a client’s money (trust funds) with the broker’s or agent’s personal or general business funds.

Think of it this way: As a real estate professional, you have two distinct "pockets."

• Pocket A: Your money (commissions earned, operating funds).
• Pocket B: The client’s money (earnest money, rents, security deposits).

Commingling happens when you put Pocket B money into Pocket A. Even if you don't spend it, the mere act of mixing the funds is a violation of the California Business and Professions Code.

Commingling vs. Conversion

New agents often confuse these two terms. You will see this distinction on the real estate exam, so memorize it now:

• Commingling (Mixing): Depositing client funds into a personal account. You haven't necessarily spent it, but you’ve mixed it with your own money.
• Conversion (Essentially Theft): Actually using that client money for your own purposes (e.g., paying your car payment with a client’s earnest money).

The Golden Rule: Commingling is the gateway drug to conversion. That’s why the DRE comes down hard on commingling even when “no one got hurt.”

Trust Funds in California Real Estate (What Money Is Dangerous to Commingle?)

To avoid commingling, you must identify "Trust Funds" immediately. Trust funds are anything of value received by a broker or salesperson on behalf of a principal or another person in a transaction.

Common examples include:

• Earnest money deposits from buyers.
• Rents collected for landlords.
• Security deposits from tenants.
• Repair reserves held for property management.
• Homeowner Association (HOA) dues (if managed by the broker).

Because you have a fiduciary duty to your client—a concept we dive deeper into in our California Agency Law Explained for New Agents article—you are holding this money in trust. It is not yours.

How Commingling Happens in Real Life

Often commingling isn't malicious; it’s sloppy. Here are the street-level scenarios where new agents get into trouble.

1. The "Personal App" Trap

The Scenario: A tenant wants to pay rent via Venmo or Zelle. You let them send it to your personal Venmo account, planning to write a check to the owner later.

The Violation: You have just commingled. That rent money is sitting in your personal account ecosystem.

The Fix: Never accept trust funds into a personal digital wallet. Use a designated business trust account or have the tenant pay the landlord directly.

2. The "Desk Drawer" Deposit

The Scenario: You get an earnest money check on Friday. You leave it in your desk drawer over the weekend and forget about it until the following Thursday. You realize you’re late, so you deposit it into your personal account just to "get it in the bank."

The Violation: Leaving the check in your desk that long is mishandling trust funds. But if you then panic and deposit it into your personal account, you’ve now committed commingling – which is far more serious.

The Fix: Deposit funds immediately (usually within 3 business days) into the proper trust account or escrow.

3. The "Short-Term Loan"

The Scenario: Your business account is short $500 for a marketing bill. You "borrow" $500 from the trust account, knowing you have a commission check coming tomorrow to replace it.

The Violation: This is conversion (theft), fueled by commingling.

The Fix: Never, ever touch trust funds for operating expenses.

Transparency is key here. Just as you must follow California Disclosure Laws (Complete Breakdown) regarding property defects, you must be transparent about where the money is going.

DRE Rules, Audits & Consequences

The California DRE has the power to audit your books at any time. They do not need a warrant; your license grants them that right.

What Triggers an Audit?

1. Consumer Complaints: A client feels their money was mishandled.
2. Random Selection: The DRE conducts spot checks.
3. Red Flags: Irregularities in your paperwork or renewals.

The Consequences

Commingling trust funds is one of the most serious trust account violations in California real estate, and the penalties reflect that severity:

• Citations and Fines: Monetary penalties that stay on your record.
• Suspension: You cannot practice real estate for a set period.
• Revocation: You lose your license entirely.

The DRE takes this seriously because it is a matter of public trust. When you promote yourself, you're telling the public they can trust you with their money. That's why our Advertising Laws for California Real Estate Agents aren’t just about fonts and disclaimers – they’re about not misleading people about how safely you handle deposits and rent.

How California Real Estate Agents Avoid Commingling Trust Funds

Compliance is about habits, not willpower. Implement these best practices immediately.

The Anti-Commingling Checklist

• Create a Designated Trust Account: If you handle client funds, open a separate bank account labeled "Trust Account" or "Fiduciary Account."
• The 3-Day Rule: Under California rules, trust funds must generally be placed into a neutral escrow depository, the hands of the principal, or a trust account within three business days of receipt.
• Zero Personal Funds: The only personal money a broker can keep in a trust account is a small amount (up to $200 in California) specifically to cover bank service charges. Any more than that is commingling.
• Reconcile Monthly: Reconcile your trust account regularly (monthly is standard) so the balance always matches what you owe clients.
• Treat Everyone Equally: Treating every tenant and buyer’s money with the same strict procedures doesn’t just prevent commingling – it also supports your obligations under California Fair Housing Laws Agents Must Know, because “special treatment” around deposits can quickly drift into discrimination territory.

Script: Explaining Trust Funds to Clients

• Client: "Can I just write the deposit check to you personally?"
• Agent: "To protect your money and comply with California law, I can’t have you make the check payable to me personally or deposit it into my personal account. Please make the check payable to [Escrow Company Name] or [Brokerage Trust Account]. That way your funds are held in a proper trust or escrow account and are legally protected throughout the transaction."

How “Commingling” Shows Up on the Test

If you are studying for your California real estate exam, expect at least a handful of questions on this topic. The exam writers love to trick you with the difference between commingling and conversion.

The "Trap" Question Logic

• Scenario A: Broker Bob puts a $1,000 deposit into his personal checking account.

• Verdict: Commingling. (He mixed it).

• Scenario B: Broker Bob takes that $1,000 and buys a new suit.

• Verdict: Conversion. (He spent it).

• Scenario C: Broker Bob keeps $5,000 of his own money in the trust account “just in case.”
• Verdict: Commingling. (You cannot store your savings in a trust account, even if you don’t touch the client’s money).

Exam Tip: If the question mentions “mixing” funds, the answer is commingling. If the question mentions “misappropriating” or “using” funds, the answer is conversion.

FAQ: Commingling Trust Funds in California Real Estate

Is commingling illegal in California real estate? Yes. It is a violation of the California Business and Professions Code and is grounds for license suspension or revocation.

How long does a broker have to deposit trust funds in California? Generally, a broker has three business days following the receipt of funds to deposit them into a trust account, a neutral escrow, or give them to the principal.

What is the difference between commingling and conversion? Commingling is the mixing of client funds with personal/business funds. Conversion is the actual use or theft of those funds for the agent’s benefit.

Can a broker keep their own money in a trust account? A broker may only keep a very small amount (typically up to $200) of their own funds in the trust account for the sole purpose of covering bank service fees. Anything beyond that is commingling.

Stay Compliant, Stay in Business

Commingling is a preventable risk. By setting up the right accounts and following a strict "hands-off" policy with client money, you protect your license and your clients.

I’ve watched smart, well-meaning agents lose years of work over a single sloppy trust-fund decision. There is no commission big enough to justify that risk.

Ready to master the rest of the rulebook? Continue your study with our California Real Estate Laws & Compliance Guide to ensure you are fully prepared for both the state exam and your first year in the field.