April 15th is Approaching: How to Get Ready for the Tax Man

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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.
Photo: StockMonkeys.com

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About Author

Mark G+ owns multiple residential rental properties. For over a decade, he has worked a full-time job in an unrelated field, managed rental property with no nightmare tenants, and received rent checks every month without hassle. Mark is the owner of leaseyourplace.com a site dedicated to helping landlords.

9 Comments

  1. Very timely and appropriate advice. It does pay to be organized, and it costs to not be organized. You’ve given me a couple of items to add to my “to do in 2013″ list.

  2. Brandon Turner

    Yeah, Excellent article Mark. This is the first year I’ll be using a CPA to do everything, but I’ve still spent a lot of time making sure it was all organized. And yes – after meeting with him, and being super prepared, he still sent me home with a huge list of things to bring back to him!

    Oh – and great video clip! It’s one of my all time favorite movies!

    • Don’t worry, you’ll get better at it.

      I have found that I am more organized during the year knowing that I have to meet my accountant at the end of the year.

  3. Wow! This is some golden advice.
    As a beginner in Real Estate, I value real life experience and advice!
    Might sound strange, but I’m looking forward to the hassle of having to find a solid accountant…

    ps. The Shawshank is at the top of my list too. Mind you, so are many others that are narrated by Morgan Freeman.
    pps. If that is the same case for you/ If you’re interested in sustainable design, check out the PBS series Design e^2

    • You are right. Do you research and ask questions to find an accountant that knows what they are talking about and works well with you.

  4. Great article on an area of landlording that is often overlooked.

    One important thing to add regarding losses. Since rental property finances are done using the cash-basis rather than accrual accounting, you can only expense actual cash out items (goods or services that you actually paid for). The most main time where this comes up is loss of rents due to evictions. It’s tempting to put the rent you should have received from a tenant as a loss expense on your balance sheet, but you can’t record it this way.

  5. karen rittenhouse

    If your business isn’t structured properly, you can’t get the tax advantages property owners are entitled to.

    If you weren’t structured properly in 2012, it’s too late for the April 15th return, but not too late to get organized and structured for every year going forward.

    And e-filings are the most audited. Sometimes filling out the paperwork is worth it….

    • I always ask my accountant if there are any perceived, although legitimate, red-flag expenses. If they are small enough, I simply omit them from my business filings. Its not worth triggering an audit.

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