Real Estate Accounting

Professional real estate agents have a lot to manage when it comes to keeping up with clients, listings, finances, and growing personal business networks.

In real estate, accounting paves a path for having accurate reports and records throughout the buying and selling processes. It also provides a way for agents to secure their own personal financial situations, and to stay organized for important activities related to tax collection and compliance.?

When it comes to good, strong accounting procedures, real estate agents can’t afford to be surprised. Whether you’re a new or experienced real estate agent or property management professional, you can use the knowledge and tools in this guide to:

• Better understand the basis and need for good accounting
• Learn the differences between bookkeeping and accounting
• Adopt industry best practices for how you manage your expenses
• Simplify your processes in order to spend more time on vital business activities
• Learn the next steps for choosing a software or platform that works for you

The Relevant Accounting Standards:

1.????IAS 40 Investment property

2.????IAS 16 Property plant and equipment

3.????IFRS 15 on ‘Revenue from contracts with customers

4.????IFRS 16 on ‘Leases’ or IFRS 13 on ‘Fair value measurement’.

Why Do Real Estate Agents Need Accounting?

Real estate agents require effective accounting procedures for a variety of reasons, some of which are based upon the type of real estate activities that a person manages.?

Regardless of whether you work on smaller real estate deals or spend your time negotiating large-scale corporate contracts, having the right accounting structure is key. Real estate accounting is important for a variety of reasons, including:

• The ability to gain high-level perspective of your personal financial situation
• Insight into your business growth from year-to-year
• The opportunity to manage your cash flow and watch for potential red flags
• Having a streamlined process for generating yearly tax returns
• Looking at your outgoing expenses in order to make payments on time

When it comes to managing financial information, it’s easy to get caught up in complexities. And while it may be tempting to make excuses or avoid tedious money management tasks, real estate professionals must prioritize good accounting habits in order to maintain professionalism.

The true goal of real estate accounting is to maintain a realistic, accurate picture of how your business is doing at any given point in time, so that you are better equipped to make financially sound decisions for growth and profitability.

While this doesn’t require a complete knowledge of everything there is to know about financial management, it does require a willingness to learn, make changes, and stay on top of important accounting tasks.??

Bookkeeping vs. Accounting for Real Estate

The terms “bookkeeping” and “accounting” are often used interchangeably, but when it comes to maintaining your real estate business, the two words may describe different things.?

In general, bookkeeping activities include things like:

• Keeping a close eye on debit and credit card charges
• Creating a system for invoicing clients and collecting payment
• Double-checking the accuracy of bank statements and records
• Maintaining good payroll procedures (if applicable)

On the other hand, accounting is broader, and encompasses a wide range of financial tasks and responsibilities. As you consider accounting as a whole, factor in things like:

• Performing audits or financial analyses to gain insight about your financial health
• Maintaining compliance with business regulations and legal requirements
• Making important preparations for tax time
• Having an accurate understanding of profits, losses, and gains

Being able to distinguish between bookkeeping and accounting not only gives you more confidence, but it may also help you to know when to delegate tasks to other professionals who can help you manage these important areas.

Real Estate Accounting Basics—What to Track

As we’ve established so far, real estate accounting is incredibly important in several contexts.

Having a strong accounting foundation is relevant whether you sell small properties as a hobby, or whether you facilitate property management services and generate millions of dollars. Although the scale of each one is different, the underlying habits are similar.

The list below highlights some of the basic things you should track, regardless of whether your operations are just getting started or have built considerable traction.

Income From Commissions:

Real estate agents generate income from property sales and from commissions associated with each closed deal. As the primary source of income, it’s vital that real estate professionals accurately track, monitor, and report all incoming sources of cash from these sources.

To keep things simple, keep track of these numbers in your accounting system of choice, rather than use separate commission trackers.?

Association Fees and Expenses:

Depending on employment status, real estate agents may be required to share some of their commission as a percentage with a brokerage or firm. This amount is considered an expense. Additionally, real estate professionals often pay for membership fees to associations and other nationwide organizations, which may count as deductions.?

Real Estate Taxes:

Emphasizing good accounting practices brings in the advantage of tax savings. As someone in real estate, you must be aware of the various taxes that apply to the field. The?real estate tax or the property tax, as it is commonly known, is a tax levied on immovable properties. The properties like land, plots, buildings all come under this class.

The tax amount varies and depends on the size and value of the property. The property tax also varies based on the following factors:

• Location of the property
• Type of Property
• Age of the property
• What is it used for

Personal Property Tax:

You may have to pay a personal property tax on these items if they generate income for your business. Personal property taxes are taxes imposed on your movable property. The tools, equipment, and vehicles that your business owns, as well as furniture you place in rental homes, might be subject to taxation.

Real Estate Tax-Saving Strategies:

If you plan properly, your real estate business could benefit from numerous tax advantages. A solid accounting system is therefore crucial. Let's review a few important tax-saving strategies.

Rental Properties:

Your business can save a great deal of money on taxes if it owns?rental properties. Rental properties can help you with the following:

• Deduction for depreciation
• exemption from the capital gains tax
• deductions for maintenance, repairs, and services
• Tax deductions for maintenance and upkeep
• deductions for real estate taxes

Depreciation:

A building's value may decline naturally over time as it wears down. This process is called?depreciation. In order to protect your income, you can record property depreciation when you file your taxes. A?depreciation calculation?can be done using various methods such as the?MACRS method (allows for larger deductions in the early years of an asset's life, and lower deductions in later years)?,?Unit of Production?method,?Straight-line?depreciation.

The depreciation amount can be deducted from your taxable income, thereby saving you a substantial amount.

Audit Defence:

There may have been a mistake in your company's tax filing that led to an IRS audit. However, there are times when a random audit is conducted. It is better to be meticulous about your accounting than to end up with heavy penalties. Hiring a trained and skilled accountant is, therefore, advantageous. In addition to audit defence training, accountants will know how to deal with the IRS and how to gather any financial information that they need.

Capital Gains Tax:

You pay capital gains tax when you sell an asset and make a profit. Depending on how long an asset was owned before it was sold, capital gains taxes may be higher or lower. If you are selling an asset strategically, you can reduce or avoid capital gains taxes.

Asset Management:

In order to maximize profits, real estate businesses should maximize the profitability of each asset. You should therefore consider the following issues:

• Tracking each property's value
• Monitoring the performance of rental properties

While speaking of accounting, the property owners or managers should pay attention to the?invoices, collected rent, security deposit holdings, and payments made to the contractor.

Continuing Education Costs:

Maintaining a real estate license costs money in the form of renewals and continuing education classes. Consider these costs expenses, and make sure that your accountant is able to include these amounts in your costs for the year.?

Office-Related Charges:

Although fairly basic, your job duties might require the use of standard office supplies, equipment, and other administrative tools. Larger expenses would include office rentals, event space, and recurring services such as cleaning or maintenance. As more real estate professionals operate in a mobile format, these costs may be minimal.?

Marketing Expenses:

Marketing and advertising are the means by which you inform the community about the services you offer. These expenses can include:

• Website design and development
• Social media management
• Print and newspaper advertisements
• Online and digital advertisements?
• Business cards
• Event sponsorships?

Travel, Mileage, and Transportation:?

Going from property to property to sell, speak with clients, or monitor a network of properties requires a lot of time and travel. Don’t make the mistake of forgetting to include these numbers in your real estate accounting procedures.?

Accounting Best Practices for Real Estate Agents

Now that you know the importance of strong real estate accounting and what to expect in terms of trackable financial information, it’s time to take a closer look at best practices.

Within the real estate industry, these five elements can separate fiscally responsible agents from those who rely on disorganized or outdated records in their accounts.?

Separate Business and Personal Funds:

Business and personal income and expenses should not be commingled with one another. That’s why most real estate investors open a business checking account for deposits and expenses, along with a debit card or card.

Business funds are kept in one place, making it much easier to review your business bank statement to locate a transaction. Having a business account for a rental property can also help to:

• Keep books organized
• Avoid inaccurate tax returns
• Improve cash flow management
• Identify opportunities to increase income and reduce expenses

Depending on your?state landlord-tenant laws, a landlord may also be required to hold tenant security deposits in a separate bank trust account.

Keep Documents Organized:

Each income and expense transaction recorded on the chart of accounts should have a backup or supporting document.

Common rental property documents a landlord needs to keep track of can include:

• Purchase and lease agreements
• Mortgage-related documents
• Vendor contracts
• Bank statements
• Invoices and receipts
• Credit card statements
• Insurance information
• Property tax statements
• HOA rules, regulations, and declarations
• Tax returns

While some investors keep hard copies, many other rental property owners scan and upload each document to a secure, cloud-based storage system on the internet. Storing real estate receipts, invoices, and documents digitally may allow you to find paperwork in minutes rather than hours.

Conduct a Monthly Review:

If you choose to use an official accounting system, much of the behind-the-scenes work will be automated. This is a huge benefit in terms of time and convenience, but you should continually monitor and perform monthly checks on your accounts.

The same is true if you work with a financial manager. Schedule a monthly meeting to review your incoming cash and outgoing expenses. If the numbers are off track, this regularity allows you to pivot and track down errors in your accounts without huge time lags.?

Use Accurate Reporting Procedures:

Accurate reporting relies on accurate numbers, which supports the idea of having a monthly review. Once you know that your financial data is correct, you can pull reports for your business accounts such as:

• Profit and loss (P&L) statements
• All available income streams
• Outgoing cash flow
• Tax documents

Manual accounting procedures limit you on the type of reports that you can generate with the click of a button, but automated software enables you to pull, analyse, and sort data in a short amount of time.

Itemize All Incoming and Outgoing Transactions:

Knowing how to properly itemize your financial accounts can not only save you time and effort at tax time, but it can also alleviate stress. Once you develop patterns and a practice of good itemization, you’ll be able to complete this step with ease.

Learn Local Requirements:

Managing real estate is very much a local and regional game, which means that rules and requirements vary based on where you live and work. One of the best pieces of advice for better real estate accounting is to familiarize yourself with local regulations specific to your jurisdiction when you get started.?

In short, managing your real estate accounting procedures is not just about personal preference. Instead, you must be in compliance with how your county, city, or state regulates real estate income.

These details could change how you choose to manage or outsource your bookkeeping needs, so it’s important to understand the expectations and policies.

Common Real Estate Accounting Mistakes:

If you’re new to accounting in any industry, mistakes could be common as you get used to managing financial records and developing a bookkeeping system that works for your personal style.?

Here are the most common real estate accounting mistakes and how to avoid them:

• Always back up your files, data, and other records:?If you maintain information in a cloud-based system, make sure that you have an automatic backup turned on. If you’re maintaining files another way, such as on paper or via spreadsheets, develop a system for duplicating these files. There’s no greater accounting headache than having to locate critical information and not being able to.
• Don’t assume you can lump all expenses together:?If you’re trying to itemize expenses for maximum tax benefits, don’t assume that each category is the same. If you’re not a tax expert, hire one to help you navigate which expenses go together, and which should be filed separately.
• Communicate with any invested party:?Real estate income happens in a variety of ways, and you may rely on multiple people to close a deal or manage investments. With accounting, never assume that these individuals know what you need in terms of documentation. Verbalize what you need, and provide timely reminders about new documents, tax statements, or other proofs of purchase.

How to Simplify Your Real Estate Accounting Needs:

If all of the information about real estate accounting processes has you feeling overwhelmed, don’t despair! There are always options for streamlining your real estate accounting.

Depending on how much you want to invest, most real estate agents turn to one of the following options for their accounts.

• Implementing a solid accounting platform: Intuitive and user-friendly platforms make it easy to get up to speed with your accounting procedures. There are plenty of options to suit every budget. As a bonus, many?real estate’s accounting software?options are cloud-based, which means that you can take your financial records anywhere and have 24-7 access.
• Outsourcing the work to a consultant or accountant: As you climb to new heights in your real estate business, you may find that hiring a financial manager is worth the investment. A professional can save you substantial time and effort with your accounts, while leveraging the power of accounting software and platforms that allow you to have visibility.

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The Right Accounting Software always takes into account everything that makes your small business unique. It’s entirely possible to find an adaptable solution that accommodates your business practices, whether that includes property management, working with tenants, or tracking commissions.

Conclusion:

Be it real estate or any other business sector, accounting has always been and shall remain an integral part of it. Without accounting, it is difficult to gauge the progress of the business. Moreover, complying with the local legal entities is also tough without a proper understanding of accounting.

The highlights pertaining to the real estate accounting are as follows:

• Real estate accounting is used for the purpose of property management which is a process that involves enormous sums of money. To record and track the transactions of these sums is referred to as real estate accounting
• Real estate accounting will enable you to compare your financial performance over time, estimate your cash flow, calculate your tax return, and make timely bill payments.
• Digitizing the business, getting a cloud-based accounting software, and outsourcing could be some of the best practices to follow in accounting
• Bookkeeping refers to the process of recording all the financial transactions taking place in your company
• The five accounting elements are assets, equity, liabilities, expenses, and income
• The property tax varies based on the factors including location of the property, type of property, age of the property, what is it used for
• A depreciation calculation can be done using various methods such as the MACRS method, Unit of Production method, Straight-line depreciation
• Having rental properties can help you save taxes just like other strategies including audit defence and capital gains tax
• A real estate owner or manager must adopt asset management by tracking each property’s value and monitoring the performance of rental properties
• Staff management is also an important part of real estate accounting where the employees’ salaries, payroll, commissions are taken care of
• A real estate accountant can play an important role in filing taxes and recording or financial data. Hiring a skilled professional can keep away mistakes in filing and other issues while maintaining financial statements

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