Minimum Requirements for Real Estate Bookkeeping.
My biggest pet peeve is bad bookkeeping. The problem is that bookkeeping required from real estate investors does not make a lot of sense (some will claim “none”). Even if you hire a bookkeeper, chances are you will not get a good job done – unless your bookkeeper is expert in real estate business.
My goal here is very modest: help people who understand general bookkeeping – but not real estate bookkeeping – get a decent job done. If this is not enough, please check out my more detailed guides.
Separation is required
- Business income & expenses must be separated from personal – even if you use the same account.
- Income and expenses must be separated between different businesses – even if you run all of them.
- Closely related businesses can be combined. Example: realtor + wholesaler + mortgage broker.
- Operating rentals is always a separate business from other investments, such as flips or rehabs.
- Income and expenses must be separate for each rental property, and usually for each flip/rehab too.
Recording of business expenses
- For each expense, 4 elements must be recorded: date, how much, who it was paid to, and what for.
- Each expense will need a category for taxes. For a detailed list of categories, see my RE Investor’s Introduction to Bookkeeping guide.
- If not using my guides and organizers, use categories from the IRS schedules C and E.
- Avoid vague categories like “other” and “miscellaneous.” Itemize expenses that are hard to label.
- Expenses count for tax purposes when they are either paid by cash/check or when charged on credit.
Bookkeeping for rental properties
- Each property must be recorded separately.
- There are also “general business overhead” expenses not specific to any property.
- All expenses prior to the “placed in service” date (such as initial rehab) are part of the property cost.
- After the “placed in service” date, it’s critical to separate current repairs from improvements.
Bookkeeping for non-rental businesses, including flipping/rehabbing
- All expenses prior to the “start” date (such as legal and education) are “start-up” expenses.
- All costs related to a specific flip/rehab property are accumulated until the property is sold.
- There are special requirements for retail/wholesale businesses that keep inventory for resale.
Bookkeeping for business use of automobile
- The IRS requires written log of your business-related mileage: when, where, why, how far.
- In addition to the log, it is helpful to keep track of all actual expenses related to the automobile.