Business Management

4 Bookkeeping Best Practices to Save on Taxes (& Survive Audits!)

Expertise: Business Management, Commercial Real Estate, Landlording & Rental Properties, Real Estate Deal Analysis & Advice, Mortgages & Creative Financing, Personal Development, Real Estate Investing Basics
126 Articles Written
bookkeeping-practices

Now that it’s tax season, we’re forced to think about our year-end tax returns for our real estate business. That means we actually have to get all of our receipts and record-keeping in order. Yuck!

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CPAs love real estate investors because many of their records are missing or incomplete, and their books are nowhere near ready for the tax returns. As a result, they happily charge their clients to fix the mess so they can do the tax returns.

Or (God forbid!) you get a letter from the IRS notifying you of an audit. That means the IRS wants to see PROOF of all of the expenses you claimed on your tax returns four years ago. Holy $#@! You’re not ready for that!

A lot of time, stress and money — but easily avoided by following these four, simple bookkeeping best practices.

4 Bookkeeping Best Practices to Save on Taxes (& Survive Audits!)

Tip #1: Know basic real estate bookkeeping.

Let’s face it, many real estate transactions are actually fairly complex to account for in software like Quickbooks. You have to know what you’re doing. A simple house flip impacts your profit and loss, as well as your balance sheet in different ways. Not getting it right during the year will create all kinds of confusion come tax time (trust me, I know!).

The solution? Learn about basic bookkeeping for real estate transactions.

How? Take your CPA to lunch. Buy a book. Buy a course or attend a seminar.

It’s worth it.

Especially if you’re going to do it yourself (not hard to do) or if you’re going to outsource the bookkeeping, you need to know at least the basics so that you can properly manage your bookkeeper or assistant.

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Related: The Book on Tax Strategies for the Savvy Real Estate Investor

Tip #2: Keep proper records.

This is the part that really sucks. We actually have to keep receipts and organize ’em somehow. What a pain.

But here’s the thing. If we don’t keep proper records, here’s what could happen:

  • An IRS audit will make your life miserable. If we’re audited and don’t have proof of the expenses, the IRS will disqualify those expenses, which will increase the back-taxes owed and add penalties and interest. Not a fun place to be.
  • We don’t get ALL deductions we’re entitled to. Are you tracking your miles? Are you measuring the size of your office to deduct part of your home’s expenses? Are you tracking your hours worked (and the activity) to justify your salary for the S-Corp exemptions?
  • Your CPA will charge you THROUGH THE NOSE to fix your mess. Many CPAs charge $200+ per hour. When I first got started with real estate investing, my record keeping sucked. My CPA charged me $1,600 to fix it. Educate yourself and keep good records.

But it’s not as bad as it seems. Here’s what I do.

Whenever I have a receipt, I’ll write the reason for the expense (if not obvious) and take a picture of it with my phone. That dumps the receipt into a Dropbox folder. Every month my assistant moves the images into the proper month’s folder so I can easily find it again later.

Easy.

Related: 3 Tell-Tale Signs You’re NOT Running a Tax-Efficient Business

Tip #3: Do it yourself.

Keeping the books actually isn’t that hard. Given the right knowledge and little bit of time each month, it’s easy to do.

I use Quickbooks online for one of my businesses. It pulls down the bank and credit card transactions. I just have to make sure the expenses are categorized correctly.

If there’s a capital expense of some sort (like replacing a furnace), I know how to properly categorize it.

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Tip #4: Hire a bookkeeper or virtual assistant.

If you don’t want to do the bookkeeping yourself, then have an affordable bookkeeper or virtual assistant do it for you.

If you bought a book or course to learn the basics, have your assistant go through the same material. They should be able to account for the kinds of real estate transactions you do (flips, rentals, lease options, etc.).

My preference is to delegate this task. However, I have made mistakes in delegating because I blindly trusted the bookkeeper. I didn’t catch errors or ask the right questions. That’s why it’s so important to know basic bookkeeping concepts.

Something to Think About

You get yourself into trouble when you don’t know what you don’t know. Bookkeeping is the same way. If you’re the average happy-go-lucky investor making money flipping or wholesaling houses, chances are you’re not paying attention to the bookkeeping. You let the receipts pile up in a shoe box somewhere and worry about the tax returns on April 10th.

I can’t judge you, because I’ve been there!

But if I could give you (and my younger self) some advice, it would be this:

Take four hours out of your day and attend a basic bookkeeping class. That way you’ll know how to properly keep records and manage your bookkeeper better. That will help you save more on taxes (both to the IRS and the CPA) and reduce your stress during tax time!

What bookkeeping or tax tips can you add to the list here?

Leave your comments below!

Michael Blank is a leading authority on apartment building investing in the United States. He’s passionate about helping others become financially free in 3-5 years by investing in apartment building deals with a special focus on raising money. Through his investment company, he controls over $30MM in performing multifamily assets all over the United States and has raised over $8MM. In addition to his own investing activities, he’s helped students purchase over 2,000 units valued at over $87MM. He’s the author of the best-selling book Financial Freedom With Real Estate Investing and the host of the popular Apartment Building Investing podcast Apartment Building Investing podcast.

    Bart Libsock Investor from columbus, MT
    Replied over 3 years ago
    Hey Michael thanks so much for the insight, I, like probably alot of other people are scrambling around right now trying to find ways to save money, but if you don’t know, well then you don’t know. Love the dropbox pic thing, will be looking to get educated in bookkeeping.
    Donald White Residential Real Estate Broker from Amherst, Massachusetts
    Replied over 3 years ago
    Is there a software package that I could track my rents and expenses on a spreadsheet every month so at the end of the year my tax paperwork is done to take to my tax person ?
    David Holland Realtor from Baltimore, MD
    Replied over 3 years ago
    Donald, I’m using Pendo Rent and like it so far. It is cheap and gives you nice looking reports.
    Tim
    Replied over 3 years ago
    I seriously need to improve my record keeping skills. By like a million percent. Thanks for the read, Michael. Good stuff.
    Curt Smith Rental Property Investor from Clarkston, GA
    Replied over 3 years ago
    Donald, I don’t personally use but I hear that xero.com is worth looking at. FWIW I would only choose a web based package, never a PC based app. I don;t want a PC crash to take out my business. Backups are always behind. I’m looking for a tutorial on how to keep books for a real estate business? ebook / website / short book?
    Jacob Pereira from Austin, Texas
    Replied over 3 years ago
    I like the idea of taking pictures of your receipts. I use Expensify, which will actually automatically read your receipts after you take a picture of it and spit out reports for you (check to make sure it’s reading properly though). It also helps track mileage which can add up, especially if you have properties all over town. At the end of the day, my CPA still organizes and manages the tax accounting, but with everything filed and just a few simple reports and spreadsheets for him to look at it’s a lot easier.
    Kevin Izquierdo from Hillside, New Jersey
    Replied about 3 years ago
    Great Tips! Ill definitely look into one of those classes because I always like to know at least some basic knowledge in everything before delegating the tasks. Great Article 🙂
    Kevin Fox
    Replied about 3 years ago
    Hey Michael. Awesome advice. Thanks for the great article!