Accounting & Taxes for Real Estate Investors

Real estate is one of the all-time favorite investments, and for good reason. I heard it best when someone said there is only so much of it and no more will be made. In comparison, companies can issue more stocks when wanted and it is not a tangible asset. I do love stocks as well, so I am not hating on the stock market.

Keeping track of your books/taxes for your real estate properties is important but can also be overwhelming when managing multiple properties. It is easy to fall behind on monthly/quarterly accounting, expenses slip through the cracks, and estimated tax payments do not get made. It’s worth getting the help from a CPA on a monthly or quarterly basis to avoid getting into trouble or letting hard earned dollars slip by.

Here are some recommendations around accounting/taxes for real estate investing:

  • Setup a LLC or LLC’s– there are some arguments that setting up a LLC for rental properties is not needed but I lean more towards having a LLC setup:
    • LLC’s protect your personal assets, if your tenant sues from getting injured on the property the LLC prevents your personal assets from being compromised
    • If you are the only member of the LLC, your tax preparation will still be relatively straight forward. A LLC is a pass-through entity, so the owner will not be double taxed
  • Have a separate business checking/credit card for your real estate income/expenses
    • Your house flipping/rental income etc. should go to your business checking account not your personal account, if money is needed to pay personal expenses, write a check from your business account to your personal account with your name on in it. Same goes when making quarterly tax payments, a LLC is a pass-through entity and does not pay taxes, so transfer money from your business account to your personal account before paying estimated tax payments
    • The LLC protection is broken if your personal/business income and expenses are mixed. Use your Federal ID Number for your business to secure the business checking account.
    • Most importantly, the real estate investor will be able to track their real estate business profit and loss much easier if they know all/most of the transactions in their bank statements relate to real estate business activity
  • Have coud based accounting software
    • It’s cheap and pretty much a necessity, the real estate investor receives a check for payment and the income automatically shows up in your accounting software. Swipe your card to pay business expenses and it automatically appears in your accounting software and then he/she can pick what kind of expense it relates to (phone bill, repairs & maintenance etc.)
    • If starting off, maybe try doing some of your books yourself. Then, ask for help from a CPA for a review of your books and recommended changes for items like depreciation, capitalization vs. expensing, amortization, etc.
    • It’s only $30 – 60 per month for cloud based accounting software and the security received of your data is better than having it in excel or on your desktop.
  • Expensing/Capitalizing
    • We help real estate investors by reviewing what they have expensed vs. capitalized for their real estate properties. Sometimes, the business owner capitalized too much when should have expensed. Expensing more means less taxes now and more money saved. The IRS will let you expense a real estate cost up to $2,500 before considering capitalization. Woohoo!
    • This is a good area to have a CPA review your books and provide guidance. Come up with a written capitalization policy i.e. (expense under $1000 automatically, I suggest $2,500 if you want to save on taxes). Also look at whether the cost was a repair or if the cost provided additional value than in its original state. This is a good area to have a CPA review your books and provide guidance. Recently, I was reading a blog on accountants going back and forth on whether a new roof should be capitalized or expensed. The answer is….. it depends 😊 Review each purchase by itself to determine proper classification. It is a higher quality roof might, might want to capitalize, if it’s the same roof or lower quality, probably want to expense. There are other factors to consider as well. Generally accepted accounting principles can be vague on these matters.
  • Monthly/Quarterly Financial Statements
    • Waiting til the end of the year to do a whole year’s worth of books is never a good idea. This will lead to inaccurate books and lost tax savings.
    • Compare financial statements month to month to monitor performance and make necessary changes
    • At the end of the month, reconcile cash in your accounting software against your bank statements, this makes sure transactions were not missed or double counted

 

Feel free to reach out if you would like our firm’s help/services!