Real Estate Accounting: A Simple Guide for Your Complex Business

The real estate industry has many moving parts, from working with high-profile clients to acquiring and managing properties. To run your business successfully, you need a cool head and the ability to multitask under sometimes pressure-filled conditions. Real estate is a complex business for even the most experienced industry insiders, and that's before you begin addressing your real estate accounting and financial work.

Use this simple, easy-to-understand guide to learn the fundamentals regarding your ongoing real estate tax responsibilities. In addition to the thorough, foundational understanding of real estate accounting you'll take away from this piece, you'll find other essential insights and considerations to weigh as you grow your real estate business.

What is real estate accounting?

What is real estate accounting, and what are its tax benefits for your business?

Real estate accounting or property accounting is the work of financial accounting for your real estate business. It involves monitoring all financial activity, maintaining records, and promptly reporting and planning for future initiatives based on these critical insights.

It is a broad field that includes a range of important work. Here are just a few of the tasks your business may use:

• Recording financial data and issuing regular reports

• Financial planning and projections

• Tax preparation 

• Managing healthy cash flow 

• Ensuring tax compliance with state and federal laws

Who needs real estate accounting?

What it means to be a real estate professional has changed over the last decade. However you're classified, embracing and relying on real estate accounting is essential. Typically, the larger the operation, the greater the real estate accounting needs. However, even independent real estate agents with smaller operations and landlords of short- and long-term rentals may struggle to stay on top of their finances. You'll lack the data to make critical business decisions without dedicated real estate accounting.

Good accounting empowers real estate professionals to stay informed about the health of their business, make appropriate plans for the future, and manage all their legal and tax obligations. This includes property management companies, individual realtors, landlords, and agents working for large companies.

Bookkeeping vs. Accounting for Real Estate Businesses

How is real estate accounting different from real estate bookkeeping?Bookkeeping and accounting are both important for your business's financial management and stability. They tend to overlap and depend on each other for maximum effectiveness.

The function of real estate bookkeeping is to ensure that all financial data is properly recorded by creating a general ledger. This is where information such as debits and credits is recorded. Maintaining the ledger is detail-heavy work, but its thorough information provides the best tools for interpreting financial data, making decisions, and forecasting in your real estate business.

Bookkeepers maintain the records for your business, handle payroll, and create invoices. They also hold the important task of financial reconciliation, which entails ensuring your bank statement matches the records in the general ledger. Real estate accountants use the financial information compiled by bookkeepers to produce financial reports. These reports are designed to help you better understand your profitability, cash flow, and financial path. Often, real estate business owners turn to CPAs for help understanding their finances at a high level for tax planning, forecasting, and advice.

How does good real estate accounting make a difference?

It's common for smaller real estate firms and entrepreneurs who are just starting out to address their real estate taxes personally. Handling your own financial work can be a short-term cost-cutting measure as long as you can produce error-free results. However, once mistakes and penalties begin to pile up, you might pay more in money and time to fix them.

Affordable, tax-deductible real estate accounting solutions will positively impact your operations and give you peace of mind knowing your accounting team is making a difference.

Plan and Project

You're operating in the dark without reliable and accurate real estate accounting. How can you adapt to sudden market fluctuations and prepare for growth if you don’t have the data or experience necessary to analyze it? You don't have a clear picture of your business's health without a comprehensive, easy-to-read income statement and a current chart of accounts.  

Good real estate accounting involves:

• Observing the market

• Making reasonable projections of where your real estate investments will lead

• Planning according to those estimates

Cutting Costs and Improving Process

An experienced real estate accountant will use several accounting processes and protocols to probe your business finances and pinpoint excess. As they scan your financial materials, they'll look for common areas where you may be wasting resources and places for real estate investor opportunities and expansion. 

What steps can be simplified in your company’s workflow? Could some business accounts be consolidated or separated to make financial reporting easier? The answers to these questions will help your real estate business promote efficiency while optimizing internal processes. 

Tax Filing and Audit Protection

Part of your real estate accountant's duties involves keeping up with changing tax laws and rules surrounding property taxes, tax credits and tax deductions for investment properties, associated rental income, selling real estate, and other developments that may impact your business taxes.

It's essential to adhere to state and federal authorities' current laws and rules so your real estate accounting team can prepare and file your business taxes. The error-free materials they submit will be audit-ready, providing peace of mind in the event your real estate business receives an audit notice from the IRS. 

Important Items to Track in Real Estate Accounting

Real estate business analysis and planning are only as reliable as the information it’s based on.Bookkeeping helps your accounting team produce the insights your real estate business relies on to move forward. You must keep track of all pertinent metrics and create real estate accounting entries in your ledger for every exchange and financial transaction.

If you’re just starting out and establishing your bookkeeping processes, these are the key items to track:

• Real estate expenses

• Short- and long-term rental revenue

• Accounts receivable and payable

• All real estate transactions in your portfolio 

• Other assets and liabilities, including rental properties and mortgages

You’ll use this data to put together your financial statements. These reports should give you an up-to-the-minute snapshot of your financial health and aid in budgeting.

What is cash flow, and why is it so important?

Cash flow measures the inflows and outflows of funds for your real estate business to assess the liquid assets you have available. Assets are important, but there is no substitute for having accessible funds in your business bank account when you need them.Your accounting team can provide cash flow statements that show how your money is being used and categorized.

Real Estate Accounting Best Practices for Agents

Adhere to these real estate accounting best practices if you'll handle your firm's financial work. Incorporating these activities into your regular accounting practices will help you produce the most favorable results for your real estate business. 

Timely reviews

Reviewing your real estate business's financial accounts and financial performance regularly and in a timely manner is essential to maintaining accurate information. Many small business owners who do their own financial work rely on do-it-yourself (DIY) accounting software or accounting systems as a central location to review current revenue levels, expenses, and other metrics.

Reviewing this information allows for modifications and corrections in case errors or improper inputs are identified. 

Accurate records

Bookkeeping can be detail-heavy, time-sensitive work that's key to supporting your real estate accounting initiatives. Because of this, it's important to maintain accurate records and make corrections after your regular, timely reviews.

You will use the information you've compiled while doing your real estate business's books to produce the financial reporting you'll need to help you better understand your profitability, cash flow, and financial path. This will aid in your real estate tax planning and forecasting. 

Maintain separation between personal and business funds (and assets)

Maintaining separate personal and business bank accounts and assets will help streamline the process of reviewing your financial statements and financial records. When it comes time to file a tax return or prepare for an audit, the last thing you want to do is comb through endless bank statements and receipts to determine how to categorize each expense.

Separate bank accounts will also help simplify cash flow and tax preparation for your real estate business. 

Itemize your accounts

Establishing efficient practices is paramount when you handle your own books and accounting. In addition to separating your business and personal accounts, you should also itemize your accounts in real time for accuracy and ease when preparing your real estate business tax return.

The itemization process is another step in promoting efficiency while doing your financial work. 

Understand (and comply with) state and local regulations

Several factors, including your selected business structure, will dictate whether you'll be responsible for paying state and local real estate business taxes. You will likely be responsible for paying employment and income tax to the state in addition to property taxes for your real estate portfolio.

For additional guidance on your state and local tax responsibilities, we recommend speaking to state and local officials or a qualified real estate tax professional. 

Get Accounting Services from a Professional

Preparing and filing your real estate taxes to minimize tax liability and maintain compliance is among the most important things you can do for your business. However, as your real estate portfolio grows, you will have fewer opportunities to address this complex work promptly while maintaining accuracy. That's why many small business owners and real estate entrepreneurs trust the tax professionals at 1-800Accountant, America’s leading virtual accounting firm, to address their real estate tax work.

Save time and achieve your annual real estate goals with our suite of affordable, tax-deductible financial services. Schedule a quick consultation–usually 30 minutes or less—to learn how business tax preparation and advisory will help you maintain full compliance with maximum tax savings.