As a real estate investor, you likely have questions about finance, budgeting, and accounting that keep you up at night. Accounting for real estate investors involves several crucial considerations to ensure financial accuracy, compliance, and effective management.
In order to protect your investments, it is best to consult professionals like Cyron & Company for your accounting needs. Skilled accountants have learned the ins and outs of real estate accounting and tax benefits for your financial reporting needs. Here are ten key items you should know when working on accounting for real estate investors.
1. Separate Business and Personal Finances
This one may seem like an obvious business practice, but many have made the mistake of combining business and personal finances. Especially if you are new to real estate investment, it can be easy to mix it up with your personal assets. Two key things to remember:
Create Separate Accounts: Maintain distinct bank accounts for your real estate business and personal expenses. This separation simplifies tracking income, expenses, and tax reporting.
Avoid Commingling: Never mix personal funds with business funds. A clear separation ensures accurate accounting and tax filings.
Having an accountant help you keep these items separate can provide significant benefits in reaching your real estate investment goals.
2. Accurate Record Keeping:
The next biggest item when working on accounting for real estate investors is to have accurate record keeping. This helps you not only to better understand where your investments stand but also helps keep you out of trouble when tax time comes around.
Document All Transactions: Keep detailed records of property purchases, sales, rental income, repairs, and expenses.
Use Accounting Software: Invest in reliable accounting software (e.g., QuickBooks, Xero) to track income, expenses, and cash flow. Your accountant can usually help you set this up correctly and teach you how to use it.
3. Understand Real Estate Taxation
No one likes tax season. Real estate investors can find themselves in a bind if they don’t understand the rules around taxes, exchanges, and depreciation.
Depreciation: Understand how to calculate property depreciation. Depreciation reduces taxable income and improves cash flow.
1031 Exchanges: Learn about tax-deferred exchanges (Section 1031) to defer capital gains tax when selling one property and acquiring another.
State tax regulations: Property taxes can vary considerably by state. In accounting for real estate investors, it is important to know the rates and regulations in the different states you have investments in.
4. Cash vs. Accrual Accounting
Cash accounting focuses on actual cash movements, while accrual accounting considers the full financial impact of transactions, even if cash hasn’t changed hands yet. When accounting for real estate investors, you’ll want to choose the method based on the business size, complexity, and reporting needs
Cash Basis: Records income and expenses when cash changes hands. Simple, but may not reflect long-term financial health accurately.
Accrual Basis: Recognizes income and expenses when earned/incurred, providing a more comprehensive view of financial performance.
5. Property Valuation and Reporting
Property valuation and reporting in accounting for real estate investors involve assessing the worth of real estate properties. Two common approaches are:
Comparables (Comps): Evaluate recently sold properties in the same area to determine a property’s value. This method considers similar features, locations, and amenities.
Appraisal: A professional appraiser assesses a property based on its condition, location, recent sales, and other relevant factors. The resulting appraisal report provides an estimated value.
To determine fair value, regularly assess property values based on market conditions. Use professional appraisers or valuation models. A professional accountant can prepare accurate financial statements (income statement, balance sheet, cash flow statement) for decision-making and investor communication.
6. Lease Accounting
Lease accounting is a crucial part of accounting for real estate investors, as it provides clarity and transparency. You want to know your lease obligations and adhere to any regulations. In addition, proper lease accounting influences credit ratings and borrowing capabilities, impacting overall financial well-being.
Operating Leases: Record lease income over the lease term. Recognize the initial direct costs separately.
Capital Leases: Treat them as property acquisitions. Record the assets and liabilities on the balance sheet.
7. Expense Tracking
Tracking your expenses is important to understand your overhead. There are two specific types of expenses with accounting for real estate investors:
Operating Expenses: Monitor property-related costs (maintenance, utilities, property management fees).
Capital Expenses: Track major improvements (roof replacement, HVAC upgrades) separately for depreciation purposes.
8. Loan Amortization and Interest
Loan amortization is the process of scheduling out a fixed-rate loan into equal payments. A portion of each installment covers interest, and the remaining portion goes toward the loan principal.
Loan Amortization: Allocate loan payments between principal reduction and interest expense.
Interest Deductibility: Understand tax rules related to mortgage interest deductions.
9. Stay Updated on Regulations
There are many regulations surrounding real estate investment. You will want to understand a variety of laws around rental and sales of investment property, tax codes, and more. Two key things to consider:
Tax Laws: Regularly review tax code changes affecting real estate investors.
GAAP and IFRS: Understand accounting standards relevant to real estate.
10. Consult Professionals for Accounting for Real Estate Investors
Accounting for real estate investors can be a tricky process and there are many things you need to account for and keep track of. Accounting professionals, like Cyron & Company, keep up-to-date on all tax and accounting regulations for real estate investments. They provide professional guidance for tax planning, compliance, and maximizing deductions.
Cyron & Company
For over 20 years, Cyron & Company has offered small businesses and individuals in and around Kennett Square, Pa., a comprehensive suite of customizable accounting and tax services, including outsourced accounting and CFO Services; tax planning and preparation; financial statement reviews and compilations; business startups and planning; and QuickBooks® online consulting and training.
Cyron & Company is known for a unique client-based approach. This clear focus allows the team to let client specifications guide the service process. Whether it’s an in-person meeting or a video conference, this team is the accessible and adaptable partner you need to best meet your financial needs. Contact us today.