You might be heading up a real estate agency, managing one or several rental properties, or working for yourself as a real estate agent. No matter what your current experience is with real estate accounting, there are some basics you need to master to make your small business successful.
Let’s start at the very beginning. In accounting, your liabilities, coupled with your equity, should equal your assets. Assets are the things your business owns that could be translated into cold, hard cash.
In real estate accounting, your property portfolio will probably make up the bulk of your assets.
Your liabilities are simply costs that you encounter while running your business. Any revenue coming in, like rental payments or proceeds from selling your property, gets filed under the equity column. Once your equity and liabilities equal your assets, you can consider your books balanced.
Balanced bookkeeping is the best way to get a clear picture of how much money you’re spending to keep your real estate properties in prime condition and how much profit you’re pulling in thanks to those efforts.
Keeping your books balanced relies heavily on the level of detail in your transaction records. If you forget to note even a small facet of your latest sale or your newest investment purchase, it can throw everything out of whack when it comes time to review your accounts.
Make a habit of recording the details of every transaction as soon as you make it. That includes relevant dates, dollar amounts, and detailed memos reminding you of what each transaction is tied to.
Hold on to receipts or check stubs, too. If the IRS ever selects your business for an audit, you’ll need those receipts to explain any sources of income you’re drawing from your real estate business.
Schedule time to go over your books at least once per month. This will help you find and fix any imbalances early before they lead to bigger problems with your cash flow.
At first, detailed recordkeeping might seem like a drain on your time. Keep at it. Good habits here will streamline your accounting process and lessen your burden come tax time.
Are you operating as a sole owner or are you engaged in a partnership with another real estate investor? Maybe you set up an LLC before engaging in any buying or selling to protect yourself from legal liabilities down the road.
Whatever your business structure is, it has an impact on your real estate accounting practices. Knowing your filing status can help you navigate your tax returns.
As you probably know, the dollar values of your real estate assets are based more on estimates rather than firm numbers. You can make an educated guess on how much your property is worth based on sales of similar properties in the area, but until you have a buyer willing to pay your price, your property’s value is a little uncertain.
It’s essential that you have access to accurate property value estimations when you’re managing your accounting. If you know how much each property is worth, you can accurately gauge whether or not your books are truly balanced.
If property valuation is not in your skill set, consider hiring a certified appraiser.
If you’re running a one-man show, you won’t have to worry about cutting bi-monthly checks to your staff. If you’re managing employees, however, it adds some more complications to your accounting practices.
Not only will you have to build wages into your budget, you’ll have to pay taxes on each paycheck. Calculate your payroll taxes each period, taking extra care to avoid mistakes in your numbers. Your employees will thank you when they file their own taxes.
Taxes are always more complicated when you own your business, but if your business happens to deal in real estate, you can add another layer of detail to your annual tax returns.
If you’re earning a profit from the monthly rent payments of your tenants, you’ll have to report those earnings to the IRS as part of your taxable income. You’ll need to complete extra paperwork—Form 1040, Schedule E, Part I, to be exact—to include with your regular return.
You are also required to report the sales of any property to the IRS using Form 1099-S. You’ll need to include details of each transaction, including the closing date, gross proceeds, identification numbers of buyer and seller, and more. If you’ve bought and sold several properties over the past year, this part of this process can get complicated and tiresome.
This is why you want to practice detailed recordkeeping early on. If you’ve done your job throughout the year, you’ll have all of this information ready to provide to the IRS and tallying your year-end taxes will be a much simpler process.
The payoff from sound real estate accounting practices is that, by looking over your past numbers, you may be able to make predictions on how successful your future investments will be.
Pay special attention to your profits and losses for each property, making sure to note any extra details you recorded in your memos. Then, use that information to calculate the risk associated with your future real estate investments.
For more information on how to calculate your risk or other business expenses, contact ACalculator today. With our collection of online tools, you can stay on top of your accounts and make your small business a successful enterprise.