A Guide to Accounting in Real Estate (With Expense Types)
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For real estate agents and investors to maintain accurate budgets, improve business plans, and prepare financial documents for taxes, they follow accounting practices and procedures. Real estate professionals can either manage financial accounts themselves or outsource the responsibility to accountants or financial managers who specialize in real estate transactions. Understanding the expenses to track and the best accounting practices to follow can help you make better business decisions and advance your career in real estate. In this article, we explore accounting in real estate, explain how it differs from bookkeeping, list the items to track, and describe the best practices.
What is accounting in real estate?
Accounting in real estate refers to the financial administrative tasks real estate agents or investors perform to maintain accurate reports and records throughout the buying and selling processes. It's important for agents and property management professionals to organize their documents for taxes and compliance purposes. Real estate agents use best accounting practices to maintain professionalism and understand their financial standing to make informed business decisions. Real estate accounting involves the accurate tracking of all expenses and income, including sales commissions and rental income.
There are many considerations for the unique tax issues involved in the real estate industry. Proper accounting techniques can help you determine how to structure deals to manage refundable taxes, capital gains, capital dividends, and other associated values. Proper accounting can help real estate professionals manage growth, make financial plans, and create accurate financial reports.
Real estate bookkeeping vs. accounting
Although some individuals may use the terms interchangeably, there are many ways in which accounting differs from bookkeeping in the real estate industry. Bookkeeping involves basic financial tracking activities, such as reviewing debit and credit charges for accuracy, creating a system for invoicing and posting receipts, and tracking vendor payments accurately. Accounting encompasses a broader range of financial activities that can help real estate agents and investors gain insights into their financial health to make important business decisions. This includes performing audits, maintaining compliance with tax regulations and legal requirements, and preparing important tax documents.
Accounting requires individuals to have a strong understanding of the profits, losses, and gains of a real estate business. It's common for real estate professionals with a limited understanding of financial documents and regulations to delegate accounting tasks to financial professionals. Engaging with a bookkeeper, accountant, or both to help you manage real estate financials can be an effective business decision. Further, some accountants might specialize in real estate accounting to help real estate agents, investors, and other professionals manage these important financial statements.
The importance of real estate accounting
Real estate agents and investors require effective real estate accounting to help make important business decisions. Depending on the type of real estate activities the professional manages, the tracking activities may differ. Here are the reasons accounting is an important aspect of real estate transactions and businesses of any size:
helps control income and improve cash flow
allows you to reduce and manage expenses
makes it easy to prepare for taxes
provides monthly and yearly performance metrics
allows you to identify trends and plan for seasonal business fluctuations
maintains accurate documentation for audit purposes
Expenses to track in real estate accounting
Real estate agents generate income from commissions associated with real estate transactions they coordinate on behalf of their clients. Along with tracking this income, it's also essential for these professionals to track various expenses they might incur with daily business operations. Here's a list of the expenses to track in real estate accounting:
Association fees and expenses
Real estate professionals often pay fees and expenses to the real estate board to which they belong. Depending on their position, some may also pay a portion of their sales commission to their brokerage or firm. If agents or investors belong to associations or professional organizations, they may also record membership fees as deductions for their taxes.
Office and supply expenses
Real estate is a highly administrative industry that requires professionals to maintain accurate documents and files. It's important to keep track of supplies, office rentals, and equipment, such as photocopiers, fax machines, and printers to record as expenses. If professionals maintain an office space, they might also track services such as maintenance, cleaning, or security. For those who run a mobile office, these expenses may be minimal.
A real estate professional might incur marketing costs associated with both their own personal promotion and property advertising. There are several tools that agents use to garner business, secure clients, and promote the properties they're selling. These costs include business cards, social media management, print and digital advertising, website design and development, and signage.
Travel, mileage, and transportation
It's important for agents and investors to track their travel expenses related to conducting business, such as mileage and other transportation costs. Depending on the service area, some agents might have larger travel expenses than others, as they typically travel between properties to show them to clients. Property managers may also travel frequently to monitor various properties.
Depending on the type of real estate you perform, you might be required to take clients for meals to close deals, discuss terms, or review available properties. You can track food and beverage purchases as expenses in your financial statements. If you host a holiday party for clients and employees, an accountant may record the costs associated with the meals and entertainment, which may also be tax-deductible.
When preparing a home for sale, some real estate agents offer additional services, such as photography, videography, and staging. Depending on the agent and the property they're selling, they may also arrange a cleaning service, lawn maintenance, or other related services. Sometimes, the real estate agent pays for these expenses and negotiates that their commission covers these costs once they sell the house.
Best practices for real estate accounting
Here are some accounting best practices for real estate agents:
Use accurate reporting procedures
When preparing financial documents, it's important to record accurate numbers you can use to produce profit and loss statements, balance sheets, and tax documents. By using accurate reporting procedures, you can ensure these financial statements are accurate and up-to-date. It's common for real estate agents to use automated software to help improve accuracy and efficiency in reporting, although some may choose to use manual reporting procedures.
Separate personal and business funds
It's helpful to create a distinct business account to keep your personal and business funds separate. This makes it easier for professionals to keep track of their business-related income and expenses, which is helpful for reconciling accounts and preparing for a potential audit. Having a business-specific debit and credit card can make it easier for you to use software for accounting, as you can seamlessly link these accounts to the software system.
Itemize all transactions
It's beneficial for you to categorize and itemize all income and expenses to record them under the appropriate category. With experience and practice, itemizing all incoming and outgoing transactions can become easier to perform. Using accounting software can help automate this categorization and help save you time.
Review, monitor, and reconcile accounts monthly
Whether you're managing your accounts alone or working with an accountant, it's important to review, monitor, and reconcile business accounts monthly to monitor your income, expenses, and profit. This monthly accounting practice allows you to maintain knowledge of business accounts and make informed business decisions. You can better prepare for taxes, monitor trends, understand seasonal business changes, and identify opportunities or risks by participating in this practice regularly.
When managing finances, it's essential to establish strong organizational practices. This includes recording all incoming and outgoing transactions in the chart of accounts and maintaining supporting documentation. Whether you keep hard copies of documents or scan and upload them to a cloud-based storage system, organizing your documents and paperwork can help alleviate stress during an audit. Here's a list of the documents you may keep and organize:
purchase, rental, or lease agreements
lawyer agreements and other files
vendor contracts and invoices
property tax statements
insurance certificates and invoices
client engagement contracts
debit and credit card statements
Use accounting or bookkeeping software
It's beneficial for professionals to back-up files regularly or use accounting software to assist with document and transaction organization. Some real estate agents who travel often or aren't typically in an office might find it helpful to use a cloud-based platform. This can allow them to access their financial records, track mileage, or review their accounts virtually.
Engage with a financial professional
If you're not confident with your abilities to monitor and track your financial information accurately or in a timely manner, it might be useful to outsource the task. Sharing this responsibility with a consultant or accountant is useful if you have limited time or ability. Depending on your comfort levels, you might choose to engage with a financial professional to help set up your accounting system and provide training, or you might relinquish these duties.
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