How to differentiate personal and business expenses

Question

Just closed on my first house hacking deal (duplex- living on one side and renting the other). I know there are some tax advantages involved (currently my next reading topic). It makes sense to me that opening a separate bank account would help me distinguish business related receipts from personal expenses.

Is this the right thought? Also, is there a credit card that anyone prefers because of the perks or any kind of other information in relation to this?

Is this the right thought?  Also, is there a credit card that anyone prefers because of the perks or any kind of other information in relation to this?

Jantsen Locke · Answer

@Bill Hampton

Appreciate the response. In regards to starting an LLC, would you need to set up a new one for each individual property?  I have read somewhere that someone did that as their strategy, but I really wasn’t sure of the advantages.

Also, are there any kind of materials out there that you could direct me to so I can dig into some of the tax info?  I actually have a degree in Accounting, but ultimately chose to start a career as an Underwriter so I’ve lost some of the things I learned.

Anthony Wick · Answer

@Jantsen Locke

So many people that want to make things more complicated than needed. You own one property. Keep a simple spreadsheet for business expenses. Takes a few minutes per week. Open a separate savings account off your personal checking account to keep reserves in. State law may require you to keep damage deposits in a separate account.

It’s really that simple when you’re first starting out. And you absolutely do not need an LLC for your first property.

Johann Jells · Answer

LLC's are controversial here, there's some good arguments to just using good enough insurance. There's a LOT of paperwork overhead to an LLC!  For many years we just used a dedicated personal checking account and a dedicated credit card and it worked fine. You can get a Federal EIN and open a business checking without being an LLC, but there's really no upside unless you want to use a DBA rather than your own name.

As far as cards, I just switched to Costco's Visa, 2% cashback and 2 extra years on warranties. That last can be important for appliances, I've had problems between 1 and 3 years.

Basit Siddiqi · Answer

@Jantsen LockeIt is not required to open up a separate account since you don't have an entity set up but it is highly suggested you open up a separate bank account.This will allow you to easily distinguist what expenses are directly related to the rental property and what is personal. This will allow for easy categorizing of expenses for your accountant.Househacking adds an complexities to your tax return. Some overhead payments(real estate taxes, mortgage interest, depreciation, repairs) are considered personal expenses and potentially itemized while others are business rental expenses.You should consult with your accountant on treatment.

Bill Hampton · Answer

@Jansten Locke,

Congratulations on your deal!

You definitely need to open a business bank account to separate your personal expenses from business expenses.

This will probably require creating an LLC and obtaining a IRS employer identification number.

I suggest you speak to your CPA or hire one to make sure you employ good business practices at the beginning of your real estate career.

Good luck and let me know if I can be of assistance.

Bill Hampton · Answer

@Jansten Locke,

Congratulations on your deal!

You definitely need to open a business bank account to separate your personal expenses from business expenses.

This will probably require creating an LLC and obtaining a IRS employer identification number.

I suggest you speak to your CPA or hire one to make your employ good business practices at the beginning of your real estate career.

Good luck and let me know if I can be of assistance.

Brian G. · Answer

@Jantsen Locke yes, imo it's a good idea to open a separate business account for all transactions (income/expenses) on the duplex. Dude congratulations! I recommend finding a RE savvy CPA who can educate you and give you forward looking strategies to help you maximize your profit and tax efficiency.

How to differentiate personal and business expenses

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