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!
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.
Download Your FREE guide to evicting a tenant!
We hope you never have to evict a tenant, but know it’s always wise to prepare for the worst. Navigating the legal and financial considerations of an eviction can be tricky, even for the most experienced landlords. Lucky for you, the experts at BiggerPockets have put together a FREE Guide to Evicting Tenants so you can protect your property and investments.
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.
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.
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.
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!