Real Estate Accounting: 5 Tips You Need to Know

Real Estate Accounting

Real Estate Accounting – What is it?

Real estate accounting is the practice of keeping an organized financial record for a business, broker, or agent.

Financial records of a real estate entity include recording income and expense transactions. These transactions would include buying, selling, and lease transactions over a specified accounting period in addition to rental inflows.

A reliable accounting setup would provide comprehensive and accurate financial records for real estate professionals and property managers alike.

In turn, the real estate entity would be able to evaluate its profits and manage its liabilities including taxes efficiently.

Top Tips for Real Estate Accounting

The real estate industry has evolved a lot in recent times. Understanding and implementing the best accounting practices is essential for any real estate business today.

Understand the Fundamentals

Even if you’re not a finance pro, understanding the accounting fundamentals will help you manage the business efficiently.

Assets: These are the resources owned by your business including property, cash, machinery, brand name, human resources, receivables, and so on.

Liabilities: This refers to money owed by you to others including taxes, bank loans, accounts payable, and so on.

Equity: It is your assets minus the liabilities of your business. It can be viewed is the value of your business at any given time.

Income: This section includes your revenue sources like rental income, commission, capital gains, and sale proceeds.

Expenses: These are your business expenses incurred to generate revenue. Real estate expenses include property investments, taxes, marketing, commission, maintenance, etc.

Here’s one of our recent blogs on 28 Common Accounting Terms Explained

Use a Cloud-Accounting Systems

Bookkeeping for real estate businesses can get to be cumbersome. For simplicity’s sake, use a cloud-accounting system to digitize your entire finance segment.

It will help you in keeping a backup of accounting records and make collaboration easier. You’ll be able to extract valuable information to make informed decisions from raw data.

Accounting and Reporting Practices

Keep an up-to-date journal of accounting transactions. Then, create your fundamental (need to have) charts of accounts from the ledger book.

A wise move is to separate your personal and business expenses if you’re operating as an agent or sole proprietor.

Also, you want to be sure that you are embedding best practice principles like reconciliation, review, and regular auditing.

Real Estate Accounting Regulations

The regulatory framework for the real estate industry keeps evolving as the industry transforms year over year. 

Your best option here is to consult a professional accounting firm that stays abreast of the latest regulatory tax and compliance requirements – saving you time, money and headaches.

Real Estate Taxation

Understand the real estate tax code first. Tax liabilities for owners and businesses in the real estate industry are different.

As a business, you pay taxes on your business income. When you owned a property, you must pay capital gains taxes on it as well.

Understanding and managing taxes in real estate is challenging. For instance, embedding accounting depreciation, tax credits, tax exemptions, capital gains taxes, and property maintenance expenses all require careful management.

If you can’t hire a professional tax preparer, consult a professional accounting firm for the best results.

How to Improve Your Real Estate Accounting Practice?

Digitization of the accounting system is only one part of the equation. The best result will be the outcome of a persistent approach.

Create an Organized System

Use cloud accounting to maintain an organized finance function. It will help you to keep digital bookkeeping records and extract valuable information whenever needed.

An organized system will let you know what to track in terms of expenses, profit margins, commission, sales growth, budgeting, and so on.

Know Your Industry Trends

The evolution of the real estate industry in terms of leasing, rentals, and affiliate commission is not new. Keeping yourself aware of these latest trends will help you formulate a flexible finance segment too.

It will also help you understand the latest tax developments and changes in the industry.

Review and Audit Regularly

Like any other business, you must perform regular financial reviews and audits of your business.

It includes regular month-end closing processes and compliance reviews. Then, seek help from professional auditors to improve your compliance score.

Outsource to a Professional Service Provider

Managing real estate accounting can be an overwhelming task for business owners. Understanding accounting and taxation regulatory requirements is also a complex task.

Working with a real estate accountant can sort things out for you. Outsourcing your real estate accounting function to a reliable partner can ensure regulatory compliance and will give you the best shot at minimizing errors and lowering your overall tax liability.

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