As a landlord, the accounting you do can be a lot more complicated than most business owners need to deal with. That’s because landlords are not just responsible for managing their properties—they’re also responsible for managing their tenants’ finances as well. Whether that means collecting rent from tenants or paying bills on time, your financials will be more complicated than other small business owners’. Here are some tips on how to simplify your accounting so that it doesn’t get too overwhelming:
Separate your business and personal finances.
If you’re a landlord and have a personal and business bank account, it’s important to keep them separate. If the tax authorities your tax return and finds that you used business funds for personal expenses, they’ll charge double penalties. So even if you think it’s small potatoes, don’t treat your tenant money like it’s yours!
Likewise, if you rent out property through an LLC or some other legal entity (which is highly recommended), make sure all of the money stays in that entity. This can be difficult when tenants pay with personal checks rather than using online banking or direct deposit with the landlord’s bank account. You can try asking them to pay by cashier’s check—but don’t let them write on their own checks!
Track property-related expenses throughout the year.
The first step to staying on track with your property tax, insurance and maintenance expenses is to keep track of them as they happen. This means using a spreadsheet or other software to log this information on a regular basis.
It’s also important not to wait until the end of the year – start thinking about taxes before you begin tracking your expenses. If you don’t record these details throughout the year, it may be difficult for you—or your accountant—to figure out what has already been paid and what needs to be paid during tax season.
To make sure that all relevant costs are tracked, include items such as utilities; water and sewer; insurance premiums; and repairs or maintenance work into your expense logs every month so that everything gets recorded properly.
Set aside money for taxes.
Setting aside money for taxes is one of the most important aspects of being a landlord. You can’t just wait until April 15th to pay your taxes, because that’s when you’ll be hit with a massive bill. As a landlord, it’s best to plan ahead and set up an automatic payment schedule with your tax authority so that they receive their share by January 1st of each year.
If you don’t plan ahead and set aside enough money for taxes, then you’ll end up paying more than what is necessary on April 15th. If this happens, then there’s really nothing else we can say other than: “D’oh!”
Hire a professional at tax time.
Hiring a professional at tax time can save you money and help you avoid costly errors. For instance, preparing your taxes is not something most people know how to do—and if they do, it’s likely that they’re not up to date on the latest tax laws that apply specifically to landlords. A good accountant will be able to advise you on deductions and credits, which can make all the difference in your bottom line. You may consider looking for an accountant who specializes in landlords’ tax issues, such as SCK Group.
Consider whether it makes sense to incorporate.
If you are a large landlord, it may make sense to incorporate your business. For example, if you have five or more rental properties and want to save on taxes by taking advantage of the lower corporate tax rate, incorporating is an option worth considering.
If you are currently working with a real estate attorney who specializes in landlord-tenant law and has experience preparing commercial leases, he or she can help guide you through this decision process.
If your business is small and does not meet the requirements for incorporation (i.e., fewer than 100 shareholders), then it probably doesn’t make sense for you to incorporate as a legal entity at all. However, if your state/country offers free incorporation services for small businesses that do not wish to pay any filing fees or annual taxes after their initial filing, then it might be worthwhile for some landlords to take advantage of this perk!
Conclusion
We hope this post has given you some helpful tips for managing your rental property accounting. Remember, the most important thing is to keep it simple! Don’t get overwhelmed by the details, and keep in mind that if you need help, there are plenty of resources available to landlords.
