The Importance of Accurate Accounting in Real Estate
Real estate can be a great investment and income provider. However, it is important to keep accurate records and maintain proper accounting principles in all aspects of real estate transactions.
Keeping Detailed Records
Multiple expenses exist for investment properties and require careful tracking. You must record all income generated from the property in the form of rent, plus you have to track all expenses to deduct. You have the cost of utilities, property taxes, as well as maintenance and improvements on the property. It is important to know what you can and cannot deduct to calculate your final profit.
Accurate records are important to provide information on accounts receivable in regards to who has paid rent and who has fallen behind. For every month that someone doesn’t pay, the company sustains a loss on that property. Proper accounting methods will bring this to light quickly for a better chance of collection.
In commercial properties, detailed records are essential when you use common area maintenance or CAM. Each tenant is required to pay a portion of those expenses in relation to the percentage of overall space. You must provide proof of these charges to collect the amount owed. Any lost records can result in the company taking the loss.
Taxes on Investment Properties
With numerous costs throughout the year, it is important to maintain detailed, accurate records to claim deductions on your tax returns. The profit on investment properties is a small percentage of the overall income received. Accounting records can become very complex, especially for commercial properties. Owners often pay expenses and then charge the tenant for a portion of the cost. They must show each side of the transaction for their tax records.
For instance, the owner may pay the property tax on a shopping center. The accounting department must then turn around and expense that out in percentage form to the tenants in the property. Any unoccupied space will be charged as an expense to the tenant. While the payment of the tax is money received, it is not income. The proper records must be maintained to prove that when filing the tax return. In fact, much of the income received by investment properties is associated with other costs and must be recorded accurately to reflect that.
There are numerous accounting transactions associated with real estate and record keeping can be complex. The average amount of profit for residential rental properties is less than half while commercial properties tend to be more. However, without the right documentation and record maintenance, you will have to show all income as profit. Proper financial management can reduce the amount of tax you owe on your property to more accurately show the correct profit figures.
The importance of detailed, accurate accounting systems in real estate investments cannot be overstated. They can protect your assets and keep you from paying taxes on money you didn’t receive as profit. This requires an expert in real estate accounting to manage a company’s finances and ensure it makes a profit.
Amanda Johns is an accomplished journalist and blogger. She writes on topics such as accounting, real estate, and investments for a variety of news sites as well as contributing to blogs and sites like this that focuses on preventing workplace fraud.