Business Management

Bookkeeping For Investors: How to Keep Your Records Straight (& Maximize Tax Savings)

Expertise: Business Management, Real Estate Investing Basics, Personal Finance, Personal Development, Real Estate News & Commentary, Mortgages & Creative Financing
101 Articles Written
investor-bookkeeping

If you are like most investors, then you probably dread the thought of doing bookkeeping. After all, who likes to go over bank statements and receipts every month? I am a CPA myself, and even I dread the thought of that mundane task.

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I recently met with a client, Jan, to go over her proactive tax planning. The planning meeting was scheduled so that we could look for ways to help her minimize her taxes for 2014. Jan had flipped a few properties, and she was afraid that she would be losing a large chunk of that to Uncle Sam come next April.

To prepare in advance for her tax planning meeting, we requested a copy of Jan’s financial statements. Reviewing financial statements is an important part of her tax planning because the financials reveal how her investments are doing financially. However, like a lot of other investors that we work with, Jan showed up to her meeting empty handed. Without her financials, we ended up using the meeting to speak mostly in “what if” scenarios:

  • If your net profit was $40k, then these are the steps we would recommend.
  • If your net profit was under $20k, then those are the steps we would recommend.
  • If you had no net profit, then here are some alternative things to think about.

It was clear in Jan’s mind how much she bought each property for and how much she sold each property for. Those were not the issues. The issues that Jan faced were that she was not certain how much she incurred in rehab costs for each property, what her holding costs were, or how much interest she had paid her private lenders for each property.

Since Jan did not have a firm grasp on how her real estate was doing financially, the meeting was not as impactful as it could have been because we were not working with very accurate numbers.

If you have ever felt overwhelmed with the mounting pile of receipts and contracts for all of your investment properties, you are not alone. Here are some simple methods that work for keeping your records straight.

Related: How to Minimize the Tax Bite When Selling Your Investment Property

Choosing a Method

There are many different types of software available for real estate investors, from QuickBooks to Zero to Quicken, just to name a few. However, the reality is that software is not for everyone. Some clients can pick up software functions fairly quickly, while others do much better with the old paper or Excel system.

Oftentimes it pays to have professionals to help you set up, streamline, and even maintain your books. Before you start entering your financial data, first take a step back to determine which method of bookkeeping best suits your style and your budget.

Envelope System

For those of you with multiple properties or multiple entities, sometimes it can be helpful to create a separate receipt envelope for each. If you use this system, be sure to keep an envelope in your car as well as in your home or office, so that you are never left without a proper place to store your receipts.

Receipt Book

Keep a receipt book with you in the car and at the office as well. You may find yourself paying cash for services or writing a check off the back of the tailgate more often than not in this industry. It is important to have a record of the expense, however small, because they help you know your bottom line. Of course, tracked expenses means tax savings as well! If you have multiple properties, make sure that you always write the property address on the memo line of your checks.

Separate Accounts/Cards

For the truly organized and well funded investors, the use of separate accounts and bank cards helps to keep things organized. Simply assign a card to a particular property and split your purchases into groups, paying with the appropriate card for each property. Use a Sharpie to write the property address or nickname on the face of the card so you aren’t relying on memory, and you can give the card to staff members without fear of them getting mixed up.

In this case, it is smart to have a primary account for the business that holds the bulk of your capital and transfer that capital as needed to the various accounts. Alternatively, if you received capital that is specific to one or a group of properties, this method can help to you easily keep those funds separate.

Related: A CPA Answers: How Can Investors Maximize Car-Related Tax Deductions?

Know Your Expenses

There are two different kinds of expenditures related to your business: those related to seeking out and vetting opportunities and those related to actual property investments. It is important to keep them separate since they may be accounted for in entirely different ways when you do your bookkeeping.

Also, be sure to have a primary account out of which you pay for travel, memberships and dues, and the initial cost related to performing your due diligence on an opportunity. Track all these expenses to ensure that you keep your money out of the greedy hands of the IRS.

What method of bookkeeping do you find works best to stay organized?

Be sure to leave a comment below!

Amanda is a CPA specializing in tax strategies for real estate, self-directed investing, and individual tax planning with over 18 years’ experience. She is also a real estate investor of over 10 years with a focus on long-term hold residential and multi-family assets across multiple states. Formerly a tax advisor at the prestigious accounting firm Deloitte in the Lead Tax Group, focusing on tax strategies for the real estate industry and high net worth individuals, and at an international Fortune 500 Company in the high-tech industry in the Corporate Tax department, Amanda’s goal is to help investors with strategies designed to supercharge their wealth building. Amanda’s highly rated book Tax Strategies for the Savvy Real Estate Investor is amongst Amazon’s best seller list. A frequent contributor, speaker, and educator to some of the nation’s top investment and self-directed IRA companies, Amanda has been featured in prominent publications including Money Magazine, Realtor.com, and AllBusiness.com. Amanda was a speaker at Talks at Google and is a 40 under 40 honoree by CPA Practice Advisor, showcased amongst the best and brightest talent in the accounting profession. Her firm Keystone CPA, Inc. was awarded a two-time winner of the Top CPA of Orange County Award by OC Metro Magazine. She is certified by the CA State Board of Accountancy and is a member of the prestigious American Institute of Certified Public Accountants (AICPA) with clients across the nation.

    Account Closed Entrepreneur from Woodbridge, Virginia
    Replied over 4 years ago
    Great write up!
    Amanda Han Accountant from Fullerton, CA
    Replied over 4 years ago
    Thanks for reading Michael!
    Amanda Han Accountant from Fullerton, CA
    Replied over 4 years ago
    Thanks for reading Michael!
    Daniel Ryu Specialist from Irvine, CA
    Replied over 4 years ago
    Thanks Amanda. I was just thinking about bookkeeping and your article offers some simple systems that I can implement. Sharpie on the credit card face – love little hack ideas like that!
    Amanda Han Accountant from Fullerton, CA
    Replied over 4 years ago
    Thanks Daniel…glad you liked it!
    Nick Leamon Investor from Mc Kinney, Texas
    Replied over 4 years ago
    The bank account system is what i use, glad to hear that it is a smart way to do it! It has made my taxes a lot simpler these last few years. Great article with some great ideas, the sharpie idea will come in handy as i acquire more properties.
    Amanda Han Accountant from Fullerton, CA
    Replied over 4 years ago
    THanks for reading Nick. As you get more and more properties it becomes more important to keep things organized.
    Darren Sager Realtor from Summit, NJ
    Replied over 4 years ago
    Thanks to Brandon Turner I now use a plug in device called Automatic to record all my car trips for tax purposes. It sends the data to a Google doc so I don’t have to write anything down. Can’t say how many trips I didn’t get credit for in the past. That one device which cost about $100 will save me thousands each year. All documented by my iPhone. Great article Amanda! You always have great tips!
    Amanda Han Accountant from Fullerton, CA
    Replied over 4 years ago
    Thanks for sharing Darren. Got to love that Brandon Turner guy with his technology tips to help us all make our lives more efficient. =)
    Steven West from Muskegon, Michigan
    Replied over 4 years ago
    Great post! I was wondering if anyone out there would like to share what software or other methods that they use to keep track of your properties and if you had tried others and what some of the pros and cons of them are? Also I know there are scanners that you can purchase that supposedly keep better tack of receipts. I’ve seen one of them on TV I think it’s produced by the neat company. Anyone ever used that or something similar? There is also a few apps for tracking receipts as well.
    Larry Im Real Estate Opportunist from Tustin, California
    Replied over 4 years ago
    Great post, thanks Amanda. As another suggestion, if you have a smartphone, why not utilize apps to help with tracking and recording receipts? There are some expense related apps that will help you log the applicable information, such as cost, business purpose, other attendees and the device GPS can even supply the location when you recorded the expense. If you want to take a no frills approach, take pictures from your smartphone and upload it using photo apps. You can even share those folders with your book keeper/tax person. Depending on which photo backup service you use, those receipts will be kept indefinitely.
    Lee Richter Rental Property Investor from Midland, TX
    Replied about 3 years ago
    Hi Amanda, You said there are two different kind of expenses those related to seeking out and vetting opportunities and those related to actual property investments. I put the ones related to a property with that property on Schedule E, but I am not sure where to put the ones related to seeking out and vetting opportunities in my area. Do they go on a Schedule C?