There are less than two months until the big day. Do not wait until April 14 to get all of your 2012 real estate books and records in the mail. You should have started January 1 of last year so you were ready to do your taxes on January 1 of this year. However, if you have been throwing all your receipts in a box, there is still time to get organized with your tax returns.
It always amazes me how many small landlords run their business through their personal checking account. The rent check is tossed in with the car payment, their paycheck, the grocery bills, and that trip to the Pat Boone show. Go to the bank and open a separate business checking account. You can open a free checking account at most banks (even at the same bank that has your personal account). Run all of your business expenses through this new account. In the event that you have a supply or repair that you pay for with your personal credit card or cash, write yourself a check out of your business checking account. Record the business expense in a spreadsheet (at a minimum make a note in memo line of the check for what the check covered) and save the receipt.
Document Your Cashflows
You are not running a not-for-profit here, so make sure you document all your cash flows. The business checking account will allow you to easily reconcile your revenues and expenses for your property. You should also be keeping a spreadsheet that coincides with your bank statements to allow for further detail in your revenues and expenses. Make sure you include all your expenses for the unit including travel (this is often overlooked by landlords), as well as cleaning supplies, association fees and other less obvious costs.
I categorize all my expenses based on the Schedule E form. This way when you sit down with your accountant, it will make everyone’s life easier.
Find a Reputable CPA
Prior to owning rental property, you may have done your own taxes with TurboTax or the old pen and paper method. Now that you are in the world of depreciation schedules, establishing a cost basis, carry-over losses, and other real estate accounting issues, do yourself a favor and get an accountant. It is money well spent (and their fee is a deduction too). My CPA, who is also a Certified Financial Planner (CFP), specializes in individual and small business returns. This guy can figure out the depreciation schedule on that AC system I installed last year before I can Google “depreciation.” In addition to having your taxes done accurately and timely, a good CPA/CFP will point out other ways you can save/invest money (e.g. ROTH IRA, helping you with your Keogh Plan, or making suggestions for investing outside of real estate).
Here is one way to find an accountant (if you are a prison guard:)
When you sit down with your accountant have as many of your revenue and expense numbers as organized as possible. Your accountant is not a secretary, so do not plan to drop a garbage bag of receipts and bank statements on his desk and say, “you figure it out.” If you treat him as one, he will still bill you as a CPA.
Try to get into see your accountant as soon as possible. No matter how organized I think I am, he always sends me home to dig up more documentation.
As tempting as it might be to fudge the numbers and reduce your revenues and/or increase expenses to beef up your losses, do not do it. Even if the IRS does not audit you, if you attempt to sell your property a prospective buyer may request to see your Schedule E. If the Schedule E does not jive with what you are telling him, he may think you are hiding something from him and he will walk away from the deal.
One other note, if you live in a multi-unit that you rent out, make sure you document ALL your expenses related to property. Your accountant will divide out personal and business use on the ratio of rental and personal units.
Leave a comment below with your thoughts or questions! I look forward to hearing your responses.