Real estate CPA Brandon Hall shares 5 tips to make tax prep and accounting for your portfolio easier
Hi, I'm Brandon Hall, a real estate CPA and CEO of Hall CPA, and today I'm going to talk to you about a few bookkeeping tips I wish all of my clients would follow.
First, it's important to understand the value that great bookkeeping brings to a landlord. Not only will great bookkeeping help you analyze your portfolio's performance over time, but it will also help you substantiate tax positions that you are claiming on your tax returns.
In my experience, landlords who highly value bookkeeping and are very organized have been through an IRS audit. IRS audits can be very painful for unorganized landlords, so it's important to use software and automation to help you stay as organized as possible with as little effort as possible. With that, let's jump into a few tips.
The first tip that I have for you is to have one bank account per rental property. While I know this might not scale very well, it is a great tip for anybody managing a smaller portfolio because bank accounts are relatively easy to spin up. As long as all the expenses and income related to those rental properties are going through the right bank account, you will effectively be able to automate your bookkeeping and make it extremely easy on yourself.
If on the other hand, you have one bank account for 10 properties, then every time you sit down and go through your bookkeeping, you're going to have to tell the system which property to put every transaction to — and that can get pretty tedious at scale.
So if you're just starting out or if you have a smaller portfolio, my recommendation is to have one bank account for every rental property and just make sure that all income and expenses related to those properties go through the proper bank account.
Another tip is to keep all receipts over $75 for a period of at least three years. I recommend using a digital storage system for this or some sort of OCR reader to attach it to transactions.
A third tip is to understand how to split your mortgage payment out every single month, as that's typically going to be the hardest transaction that you have to book on a monthly basis. Whenever you see your mortgage transactions show up in your software, you have to split it out between mortgage interest, mortgage principal, insurance, and property taxes.
Of all four of those, only the mortgage interest is currently deductible. The mortgage principal piece will reduce your mortgage liability on your balance sheet, and the insurance and property tax amounts should be increasing your escrow balance on your balance sheet.
Remember, when we make payments into escrow, they are not currently deductible. They are only deductible when escrow actually pays the insurance bill or pays the property taxes on our behalf.
The fourth tip is to make this all as simple as possible on yourself. And there's two ways to do that:
If you wait till the end of the year and do it all at once, you will have forgotten the context that's necessary to understand how to record certain transactions. So, I highly recommend that you put a block in your calendar for a few hours at least one time a month to stay current with your monthly bookkeeping.
The last tip is to use your up-to-date accounting records to help you analyze how your portfolio is actually performing. Many landlords who don't have good accounting records simply look at their bank balances to determine if their properties are performing as expected or not.
And that might work fine for you for one or two properties, but at scale, that system will fail — trust me.
When you have great accounting records, you can analyze each property and also the portfolio as a whole, and that can be beneficial especially when you have properties in different geographic locations.
Maybe your properties in one state are outperforming your properties in another state. Maybe you realize one set of properties' utility bills are significantly higher than another set in the same geographic location — which could indicate that your HVAC system may need repair.
Or maybe your banker is asking for a year-to-date P&L, and you're able to whip it up real quick because you have great accounting records.
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Brandon Hall is a real estate-focused CPA and the CEO of Hall CPA. Learn more about Brandon and his team over at https://www.therealestatecpa.com/.