If you’re a landlord, chances are you feel swamped on a regular basis and barely able to keep track of your renters, much less your accounts. We’ve got some tips for you when it comes to your real estate accounting, but remember as with every small business, if you find yourself swamped you may want to ask the question of whether doing your own bookkeeping is a wise plan or an exhausting one.
Either way, here are a few things you’ll want to make sure these accounting aspects don’t get missed in your real-estate world:
Keeping good records
As we will talk about in our series of the top 10 bookkeeping mistakes most small businesses make, failing to keep good real estate accounts or bookkeeping records can make your life and business that much more difficult. If you stay on top of your income, expenses, and other accounting details, it will make it so much easier when you’re reviewing things with your accountant and determining which expenses are deductible and which are not, and how to maximize your profit (see below).
Your rental income is comprised of what you receive before any deductions (see below). When it comes to real estate accounting, you’ll want to include everything that relates to the actual occupancy of your property – for example, deposits paid by tenants aren’t truly income since you may return some or all of it to the tenant upon their departure. (If they leave and for various reasons you keep the deposit, in part or whole, it then becomes income to you – and any portion you pay back to the tenant is not an expense since it was never income in the first place.) Also, remember that if your tenant completes some form of service in part payment for their rent, this should be reported as income as well.
One of the hardest things for any small business, but especially so for landlords, is the challenge of when and whether to raise rent. You face the challenge of losing a good renter if you raise rent too often; but you face losing profits if you never make changes. So one of the ways you can address this is by making sure you’re not missing any deductions – and many landlords are.
Consider the following potentially deductible expenses related to real estate:
– Maintenance and repairs
– Mortgage/loan interest
– Insurance costs
– Salaries or fees for building or property managers
– Association fees
– Gas and electric for ‘common areas’
– Real estate taxes
If you’re not sure, just ask.
Personal Use of Property
If you’re using a property for your own personal use during some of the year, this affects your expense deductions and declarations. This even includes a friend or relative of you, the landlord, so be cautious when you’re going this route. Keep a note of how many days the property was available for rent, but was vacant (or occupied by yourself, a friend, or relative), and use that for calculating your personal percentage.
Method of Real Estate Accounting
There are two basic methods of accounting no matter what type of business you have – we discuss these more in our Bookkeeping Mistakes posts. It’s the same for those looking at accounting for the real estate industry. One is the cash method, which essentially means money coming in is recorded as income when it arrives to you, and money going out is recorded as an expense when it is paid. The accrual method involves more calculations and an analysis of what period to which the income or expense actually applied. Most people start out with a cash accounting basis, but it is possible to make a change if you are consistent.
There are a variety of forms you’ll need to complete – your 1040, of course, and a Schedule E (with the potential of additional Schedule E forms depending how many properties you have). You may also need to complete Form 4562. If the rental property is owned by a business, as opposed to you individually, there are additional forms to be considered depending on what type of business it is.
We encourage you to consider these issues as a landlord, and feel free to pick up the phone to call us (even if you’re not our client) to ask a few questions.