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Real Estate investors are familiar with two of the most critical factors that affect profitability when managing and renovating a property: efficient cost control and knowing your cost versus budget in real-time. What area of costs do you feel you have the least control over in your business?
Expenses can mean many things in the real estate industry. First, there are direct costs and indirect costs. Direct costs include insurance, interest, improvements, maintenance, repair, payroll, taxes, and more. Then, you have QuickBooks subscriptions, office supplies, phones, business insurance, and more for the indirect cost. In short, these indirect expenses are not directly related to a property.
The focus of this article is to segregate the expenses incurred directly for a property immaterial if you get a cost segregation study. Cost segregation is a study where an engineer breaks down all the intangibles into categories, where you can accelerate your depreciation and lower your taxes.
When your property does not qualify for the study, you should record and reclassify your expenses in detail to be eligible for tax savings. Unfortunately, expenses do sneak up and bite a real estate investment if it doesn’t get the attention it needs from the start. Keeping track of detailed expenses can save you 1000s in taxes, streamline your accounting process, and help you grow your business.
Fixing or replacing is a decision we all must make depending on various factors. Here is a simple way to identify the difference between repairs, maintenance, and improvement. Remember that you keep receipts, and the words on the bill are clearly noted, so you can decide how to classify the expenses.
Repair
Replacing a board will make the deck usable and safe.
Accounting:
Account Name: Repair
Account Type: Expense
Report: Profit Loss
Maintenance
Power washing increases the life of the deck and will last longer.
Accounting:
Account Name: Maintenance
Account Type: Expense
Report: Profit Loss
Improvement
A new or replaced deck increases the property’s value.
Accounting:
Account Name: Improvement
Account Type: Fixed Assets
Report: Balance Sheet
To differentiate between expense and improvements, ask yourself: Does the cost increase the property’s value?
If it is a yes, then categorize it as an improvement. Right, you must be saying, but I can take bonus depreciation, and I was told that any expense incurred below $2,500 should be expensed. A tax preparer is looking at it from the tax saving perspective, but I am looking at it as an investor. I want to see the property’s value at the end of the day. When I am ready to sell the property, I review how much I have spent on acquiring and improving my asset. For that, I open QuickBooks and review the Fixed Assets on my Balance Sheet for that specific property. After recording an adjusting entry, I can see my property value vs. tax adjustment in black and white.
Please keep it simple and updated to know what you want and keep your tax preparer happy.
As you incur expenses depending on your rental, there are different tax implications. Organize your books to take advantage of the tax savings with bonus depreciation, tax-deferred 1031 exchange, cost segregation, and home office. Below is a quick overview of how expenses are organized for rentals:
Account Name
Deductible?
Account Type
Reports
Insurance
Deductible
Expense
Profit Loss
Taxes
Deductible
Expense
Profit Loss
Insurance
Deductible
Expense
Profit Loss
Repairs
Deductible
Expense
Profit Loss
Maintenance
Deductible
Expense
Profit Loss
Property management fee
Deductible
Expense
Profit Loss
Software subscriptions
Deductible
Expense
Profit Loss
Legal fees
Deductible
Expense
Profit Loss
Bookkeeping and tax preparer
Deductible
Expense
Profit Loss
Interest
Deductible
Expense
Profit Loss
Mortgage Principal
Non-Deductible
Liability
Balance Sheet
Escrow
Non-Deductible
Asset
Balance Sheet
Improvements
Depreciate
Asset
Balance Sheet
Loan cost
Amortized
Asset
Balance Sheet
These are just a few expenses, but there is a detailed list of expenditures and chart of accounts with step-by-step instructions in my bookkeeping course built just for investors and landlords. Real estate offers many tax-saving opportunities and is only attainable if you accurately record your transactions. In addition, understanding and tracking each expense will help you, as a landlord, understand your cash flow.
QuickBooks is made for you if you are the do-it-yourself landlord managing flip or rental properties. The software helps investors simplify income, expenses, assets, and liabilities, digitize their receipts, and track mileage, tenants’ rents and late payments to reconcile accounts. You can also customize and review your reports for tax time. You can learn more about using QuickBooks for agents, brokers, investors rentals, and flips at www.RealEstateAccounting.com and receive 10% off at checkout.
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About the Author
Gita Faust founded RealEstateAccounting.com, a business process and software consulting firm that grasps complex real estate and property management accounting concepts and turns a mess of numbers into comprehensive financials to increase cash flow and streamline their workflow efficiently.
Gita is an Investor, Accountant, QuickBooks Solution Provider, and Intuit speaker. Her online workshops offer real estate bookkeeping and accounting training using QuickBooks, as well as in-house products for DIYers, to teach, troubleshoot, and coach clients and other accounting professionals throughout the United States.
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