Learn the importance of accurate and compliant real estate accounting, and best practices to help you steer clear of costly fines or audits.
As a real estate investor, there are many ways to protect your investment: from screening tenants and proactively maintaining your property to setting appropriate rental rates. Among your most important responsibilities, however, is maintaining an organized, accurate financial record.
Proper real estate accounting is central to a successful, healthy rental property business. This involves keeping track of your rental income and expenses, fully understanding and adhering to tax obligations, and staying up to date on your portfolio’s business performance. Without organized accounting systems, landlords risk financial missteps, including steep fines or audits from the IRS.
Here, we offer six real estate accounting tips to help landlords better manage their rental property finances, and reap the rewards of fewer risks, higher tax savings, and potentially greater rental income.
Whether you’re tracking finances for one or multiple properties, organization is crucial. A streamlined approach to rental property accounting can help you access important financial information more efficiently, strengthen your business performance, and save when tax season rolls around.
The best way to stay organized is to create a process for tracking your rental income, expenses, and other transactions. Many landlords use software to generate standard financial reports, like profit and loss (P&L) statements or cash flow statements. Landlords should also keep a record of all relevant financial documents across their rental portfolio, including receipts, invoices, and leasing agreements — ideally online. Digital recordkeeping minimizes the risk of lost documentation, offers greater security, and means you can find what you need more efficiently.
As a rental property owner, you’re probably aware of the tax benefits of real estate. However, navigating tax law is a crucial responsibility that comes with the territory. If you fail to adhere to real estate tax laws in your state, you risk unnecessary fines or IRS audits.
Rental property ownership comes with a host of advantages — notably tax breaks and benefits — that landlords should be aware of and capitalize on. The government actually incentivizes owning real estate, making it possible for landlords to capitalize on tax deductions, not have to pay the Federal Insurance Contributions Act (FICA) tax on rental income, and avoid capital gains taxes with incentive programs like the 1031 exchange. Stay informed about evolving tax law, or work with a CPA who can maximize these benefits.
In real estate, commingling refers to mixing funds from your business with personal or other funds. One common example is when landlords put security deposit funds in a personal bank account, or even a bank account they use to collect rental income.
Commingling is a slippery slope that can have serious legal implications, but it’s often an honest mistake on a landlord’s part. Landlords should create a system to avoid commingling altogether. One easy solution is to create a dedicated landlord bank account for rental income and expenses that is separate from your personal account. It’s also a good idea to create a separate bank account for managing security deposits.
To add even more protection, consider creating an LLC to completely separate your rental property business from your personal assets. Just keep in mind that creating an LLC requires ongoing work, including regular renewals and annual fees, to keep your business entity in good standing.
Accurate, up-to-date accounting requires insight into how your rental properties are performing. In other words: you can’t make any improvements to your business if you’re in the dark about its success.
It’s a good idea to consistently track your profits in a standard P&L statement to evaluate how your rental income stacks up against your expenses. Equipped with an overview of your net income, you can then make adjustments to your business model and find more opportunities to increase your profit. For example, amid housing shortages and high interest rates, many landlords are raising rent to stay profitable. Regularly reviewing your business performance can help drive smarter decision-making and ultimately funnel more money into your business.
When tax season rolls around, no one likes scrambling to organize a year’s worth of transactions in one night. It’s overwhelming and can lead to inaccuracies in financial reporting, especially if you’re in a rush.
Landlords can avoid the unnecessary scramble by tagging their rental property expenses by category and property as they come in during the year. Many accounting softwares enable you to manually or automatically tag transactions with the appropriate Schedule E categories and property assignments in real time, helping you stay organized year-round and prepared for tax season.
Reconciliation is the process of ensuring your bank account statements align with the ledger for your business. This is an important part of maintaining a healthy business where and ensuring every dollar spent and received is properly accounted for.
By conducting monthly reconciliations, you can be sure your accounting records match the transactions in your bank account and your records stay accurate throughout the year. And using an accounting platform designed for landlords, you can quickly track and reconcile your cash flow, income, and expenses in real time. This will simplify your life during tax season, saving you from reviewing an entire year’s worth of finances in a short time.
Organizing finances for one property — not to mention an entire portfolio — can be daunting. Overwhelmed by the process, and not sure where to begin?
Azibo’s comprehensive platform for rental property finances helps landlords get organized and stay compliant, during tax season and beyond. With Azibo, you can collect rent, track income and expenses, find quality tenants, choose property insurance, and more in one central hub.
For more real estate tax benefits and tips, read our blog post 7 Landlord Tax Tips to Get Organized for Tax Season.