How You Can Benefit From Accounting for Real Estate Investors
FAS CPA & Consultants
You’re not merely keeping records. You are measuring your performance and the financial health of your enterprise.
Your books also provide a yardstick to evaluate how different jobs and properties perform. For example, are you over budget and beyond the deadline, or are you sticking to budgets and timelines? Developing a spreadsheet for every property and staying on track will become second nature. Instead of spending blindly, accurate books will remove the guesswork and ensure you never spend more than you have. In addition, separate spreadsheets will mark properties that are not paying their way.
Reputation management is vital on so many levels. Your credit score ultimately defines how far you can expand into the property market. Insiders in the industry avoid disorganized operations lacking oversight that make repeated mistakes, pay late, and frequently make incorrect payments. Disciplined accounting and meticulous record keeping is the foundation of the stellar reputation you need to become a substantial player in real estate.
Real Estate Accounting Regulations
Objectives
⇒ Protect Investors.
⇒ Increase Real Estate contribution to GDP.
⇒ Widen the distribution of wealth.
Financial Accounting Services Board [FASB]
⇒ A nonprofit authority responsible for setting and maintaining accounting standards in the US.
⇒ Maintains a website where standards are accessible to all.
Regulations
⇒ Accounting errors can be amended.
⇒ Misleading or dishonest accounting methods can lead to prosecution.
⇒ For a startup, the accounting environment can be a labyrinth of risk: it is precautious to hire professionals to guide you through the process to ensure compliance.
Real Estate Accounting Best Practices
Cloud-Based
⇒ Cloud-based software is accessible wherever you go whenever you require financial information.
⇒ Sharing of data among team members is easy.
⇒ It places all accounting elements in one location.
⇒ Allows real-time analysis.
Digital
Digital receipts are convenient, especially when you lose some tickets or need receipts for auditing.
Your cloud-based ledgers need evidence for every transaction. Mobile apps and scanners can make this seamless.
Outsource
Hire professional CPAs to guarantee accurate reporting and lighten your burden. Then, focus on your core business and allow the accountants to do the rest.
An Accounting Professional will structure your operation in a tax-efficient manner. They will provide regular reports enabling you to develop realistic and practical financial plans and investment strategies.
⇒ To organize and label financial transactions consistently, create a Chart of Accounts to list all assets, liabilities, equity, income, and expense accounts.
⇒ Use property management accounting software or a simple Excel spreadsheet to accomplish the task.
⇒ Decide between using a cash or accrual accounting basis. Accrual accounting records revenue and expense events, while a cash accounting system records revenue when the money comes in or goes out.
⇒ Property managers prefer the cash accounting system, but on the downside, you might lose track of revenue or expenses when they occur, except if you employ property management accountants or software.
It remains precautious to have a paper backup to your digital accounting system. Books without paperwork sometimes make the IRS query your expenses. Similarly, paperwork without records will make it impossible to understand your financial situation.
The only paperwork you require:
⇒ Box of manila folders
⇒ Filing Cabinet
⇒ Folders:
⇒ Bank statements
⇒ Expenses
⇒ Insurance
⇒ Tax Returns
Benefits If You Outsource Accounting Tasks
⇒ Vital for effective business management.
⇒ Allows you to monitor your progress.
⇒ It shows whether you are making a profit.
⇒ It identifies properties that are doing well and those that don’t.
⇒ It allows you to compare your progress to previous periods.
⇒ It provides an estimate of your cash flow.
⇒ It will ensure timely payment of all bills.
⇒ Accuracy is vital and prevents losses, fines, and penalties while aiding informed decision-making. All transactions will be included and accounted for, and when the tax returns are produced, profits will be minimized by having all deductible expenses.
⇒ Depreciation is a vital aspect of real estate investment and frequently creates problems for investors who miscalculate or apply incautious methods.
⇒ Accelerated Depreciation
⇒ Short-term benefit: Using accelerated depreciation is beneficial during the first years since higher depreciation deductions can affect the viability of a transaction.
⇒ Downside: You will pay much more tax when selling the property.
⇒ Straightline Depreciation
⇒ The IRS requires depreciation for residential property to spread in equal amounts over 27½ years and commercial property over 39 years.
⇒ Straightline depreciation removes any liability to repay depreciation taxes upon selling the property.
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Accounting For Real Estate Agents
Realtors must keep up with clients, market listings, finances, and business networks. Successful realtors must connect, sell, and close inside a commercial environment built on skilled administration and advanced accounting practices. Accurate reports and records are vital before any buying and selling can commence. Afterward, realtors must secure their financial survival while remaining organized to ensure tax collection and compliance. Realtors cannot afford surprises.
⇒ Develop an understanding of your financial situation.
⇒ Monitor the annual growth of your business.
⇒ Manage your cash flow and be on the lookout for red flags.
⇒ Streamline the production of your tax returns.
⇒ Ensure timely payment of bills.
⇒ Control your expenses.
The secret is keeping things simple without ignoring complexities. This goal can be achieved if you develop productive accounting routines that allow you to establish and maintain a financially sound view of your enterprise that equips you to make rational decisions to enhance growth and profitability.
Don´t Forget
⇒ Control credit and debit card charges.
⇒ Systematize invoicing and payment collection.
⇒ Double-check bank statements.
⇒ Pay close attention to the payroll.
An onboarded Accounting Professional will help you to find collaborators in your investment efforts. In isolation, it is challenging to identify suitably qualified insurance agents, real estate agents, attorneys, and other professionals. Furthermore, the accounting professional can provide suitable hiring strategies for these experts.
Vital Aspect That Require Your Full Attention
Income from commissions: A realtor’s primary source of income derives from commissions earned for every deal closed. Accuracy is critical. Track, monitor, and report every cent earned.
Association Fees and Expenses: Many realtors must share a percentage of commissions with their brokerage firm at considerable expense. The same goes for membership fees to associations and various nationwide organizations. These qualify as deductions.
Continuing Education: It is expensive to acquire a real estate license, which requires annual renewals, continuing education, and training. These expenses must be included in yearly costs.
Office Costs: You might consider these costs almost immaterial, some realtors require supplies, and many pay for office rental, event space, and cleaning and maintenance services.
Marketing Costs: Advertising is the backbone of sales, and marketing requires exposure. Costs will include:
⇒ Business Cards
⇒ Event sponsorships
⇒ Old-fashioned print advertising
⇒ Online and digital advertising
Accounting professionals are well-versed in the prudent use of leverage. Rather than searching for receipts and going over endless spreadsheets, delegate the task to a professional who can guide you toward low-risk growth.
Specific Local Requirements: The rules and requirements that regulate realtors are based on your location. It is vital that you investigate local regulations specific to your jurisdictions. You must comply with county, city, state, and federal rules and regulations about realtors.
Advice From Veteran Realtors
Back up all your files, data, and records. Connect to a cloud-based system and activate automatic backup systems. Duplicate your paper files and store them separately. Never lump expenses together, not even when you try to itemize expenditures for tax purposes. Similar categories are not necessarily the same. Instead, instruct a professional to categorize expenses.
IRS Schedule E: Itemization of Expenditure
⇒ Advertising
⇒ Cleaning & Maintenance
⇒ Commissions
⇒ Depreciation Expense
⇒ Insurance
⇒ Legal & Professional Fees
⇒ Management Fees
⇒ Mortgage Interest Paid
⇒ Taxes
Always communicate with all stakeholders involved in a sales transaction. You can only rely on people if you verbally inform them of your needs and requirements and constantly send out reminders to ensure that all documents, statements, and proofs of purchase arrive at the right time at the right place.
Commercial Vs Residential Real Estate
Commercial Real Estate
⇒ Managing commercial units.
⇒ Bills for rent and property taxes are presented to tenants at different times of the month and year.
⇒ In many states, tenants pay sales tax in addition to rental charges.
⇒ The accountant’s task is simple when multiple accounts are used for various properties, preventing income and expenses from becoming intertwined for different assets. More complicated than residential real estate. Real estate taxes payable are distributed to tenants annually and determined by the square footage occupied.
⇒ Open a separate account for security deposits. Some states require security deposits to be held in individual escrow accounts. When allowed by state law, put security deposits in a trust account. It will provide precise details of total income and expenses per client. As a result, what you owe to the client will be transparent and available.
⇒ Income and expenses on the bank statements are classified, and reports and financial statements are produced.
⇒ Depreciation is carefully managed. It provides substantial deductions reducing profits for property owners who benefit from the tax shelter provided. Commercial property is depreciated over a period of 39 years.
⇒ When the property is resold, the depreciation is recaptured. The owner refunds the depreciation, which is then added to the sales price. As a result, the capital gains tax will be higher, but the seller can benefit from the 20 percent preferential tax rate.
⇒ Accountants will assess and review all income and determine the sales-and property taxes payable in addition to rental payments.
Residential Real Estate
⇒ Managing residential units.
⇒ To record income and expenses for a property, link a specific bank account to each property. No property taxes payable are distributed or collected.
⇒ Tenants do not pay sales tax on rent paid.
⇒ The accountant’s task is simple when separate accounts are used for various properties, preventing income and expenses from intertwining for different assets.
⇒ Open a separate account for security deposits. Some states require security deposits to be held in individual escrow accounts. When allowed by state law, put security deposits in a trust account. It will provide precise details of total income and expenses per client. As a result, what you owe to the client will be transparent and available.
⇒ Income and expenses on the bank statements are classified, and reports and financial statements are produced.
⇒ Depreciation is carefully managed. It provides substantial deductions reducing profits for property owners who benefit from the tax shelter provided.
⇒ When the property is resold, the depreciation is recaptured. The owner refunds the depreciation, which is then added to the sales price. As a result, the capital gains tax will be higher, but the seller can benefit from the 20 percent preferential tax rate.
⇒ Residential property is depreciated over a period of twenty years.
Bookkeeping Vs Accounting For Real Estate Investors
| TERM | CONTENTS | COMMENTS |
| Bookkeeping | Recording all enterprise transactions | Purchases, sales, payments, or anything else must be recorded when it occurs. |
| Ensure accuracy while accurately reporting income in a manner that will stand up to IRS scrutiny | ||
| Maintain records for every transaction recorded on a ledger, albeit it paper or digital | ||
| Double entry system | Debits | When enterprises receive cash payments |
| Credits | When enterprises make cash payments | |
| Accounting equation | Assets=Liabilities+Equity | The sum of liabilities and equity is equal to the enterprise’s assets. |
| Accounting | You will understand your accounts and finance by recording and reporting the elements below. | |
| Assets | Beneficial possessions of the enterprise | |
| Principal Assets | For Real, Estate enterprises property is considered a principal asset | |
| Fixed Assets | Buildings and land | |
| Current Assets | Stock, investments, cash | |
| Equity | The difference between Assets and Liabilities | |
| Assets-Liabilities=Equity | ||
| Where more than one owner in the company owns different stakes, separate accounting must be provided for each and all | ||
| Liabilities | All the debt held by the enterprise | |
| Essentially the inverse of assets | ||
| Assets-Equity=Liabilities | ||
| Fixed Liabilities | Debts payable over a fixed period of longer than one year | |
| Current Liabilities | Debts payable over a period of less than one year | |
| Expenses | All payments made by the enterprise except for debt, which is excluded. In a real estate firm, salaries paid to employees exemplify expenses. | |
| Income | Money earned by selling goods or services. For a real estate firm, income will include rent collected from tenants. |
Check Our Service: Tax Planning For U.S. Real Estate Investors
What Real Estate Accountants Do?
⇒ Accounting and financial records and reports detailing the development and operational costs are created and used to develop and manage budgets.
⇒ Create and develop revenue and expense reports and cash-based income statements.
⇒ Assist in producing cost estimates and annual reports
⇒ Assist in negotiating and documenting rental agreements, leases, and property sales.
⇒ Produce lease and rental summaries.
⇒ Determine tax liability and produce tax returns.
⇒ An IRS audit might follow the discovery of accounting errors or occur randomly. Again, the employment of a skilled and meticulous accountant is your best defense when this happens. Accountants undergo audit defense training, are used to dealing with the IRS, and can quickly produce any required information.
CPA For Real Estate Taxes
⇒ Thoughtful tax planning and a solid accounting system result produce multiple tax benefits.
⇒ Ownership of rental properties benefits enterprises through the:
⇒ Deduction of depreciation.
⇒ Exemption from the capital gains tax.
⇒ Deduction of maintenance, repairs, and services charges.
⇒ Deduction of real estate taxes.
Capital gains taxes are payable on the profits made by selling assets. The rate expected is determined, amongst other things, by your period of ownership before selling. Strategic selling plans will help you to reduce or avoid capital gain taxes.
Financial Management Of Real Estate Employees And Assets
⇒ Accounting is vital in optimizing the value gained from assets and employees. Profit can only be maximized when every investment is managed optimally, which requires an enterprise to:
⇒ Keep track of the value of every asset
⇒ Accurate monitoring of the performance of rental properties
⇒ Tracking invoices, collected rent, security deposit holdings, and contractor payments.
⇒ Accounting simplifies the management of employees by keeping track of the following:
⇒ Remuneration
⇒ Hours worked
⇒ Payroll
⇒ Commissions
⇒ Hire a CPA to develop your accounting system and coach you on best practices. Then, your CPA will become a vital team member when tax season comes.
⇒ Keep your collections current:
⇒ Don’t allow your collections to run late – it will hurt your bottom line.
⇒ When fees are waived, record it accurately and categorize them accordingly.
⇒ Use a consistent system aligned with the state and local guidelines. This will safeguard everyone involved from landing in more precarious situations.
⇒ Budget for unexpected expenses
⇒ Emergencies occur, and nothing is more unpleasant than running around to find the cash to finance a crisis. Looking at Europe in 2022, for example, massive increases in energy costs, rising by as much as 1000 percent, were entirely unexpected. Success often equates to merely surviving the storms.
⇒ So, slowly build up a ‘rainy day fund.’ Many real estate entrepreneurs recommend setting aside a fixed percentage of revenue into the rainy day
⇒ Make use of historical data to forecast future expenses. Then, look back over the years and put enough money aside to cover past emergencies. History often repeats itself.
⇒ Reconcile your accounts frequently
⇒ There are always errors; that is why reconciliations are vital. Find errors and omissions before any harm is done. It is time-consuming, but suitable software will make your task easy.
⇒ Do it every month, and determine whether there are any missing funds or overpayments.
⇒ Automate accounting tasks wherever possible. You need systems to make a success of managing a property enterprise to simplify your life. Therefore, systematize day-to-day tasks to keep things as simple as possible.
⇒ For example, enable automatic payments if your cash flow is strong enough.
⇒ Also, allow reminders and automatic withdrawals. Anything that will free up time will improve your control of the enterprise.
⇒ The day you begin your business, you become beholden to local, state, and federal agencies.
⇒ Mistakes cost money, and corrections require arduous effort on your behalf.
⇒ Therefore, we recommend you familiarize yourself with all the applicable tax forms.
⇒ In return, bookkeeping will become easier for you, and your work will become more accurate.
⇒ When tax season arrives, your life will not be disrupted by looming fines and penalties resulting from noncompliance with IRS documentation requirements.
Know Your Tax Forms: IRS requires a W-9 form to document a contractor’s tax ID number and business type. A form 1099 is an additional requirement for any contractor earning more than $600 from your business within a calendar year.
Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intended for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. This article cannot serve as a substitute for such professional services or advice. Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation. This article is subject to change at any time and for any reason.
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