Bookkeeping for real estate is one of the most essential activities for investors who are willing to maintain their finances up to date. In the realms of finance and accounting, bookkeeping involves the meticulous documentation of every financial transaction within a business. Investing in real estate has the potential to be highly profitable, yet mastering this intricate field goes beyond merely selecting the right properties and tenants. As a real estate agent or investor, you’re probably deeply involved with countless operational challenges. Key activities such as decision-making, capitalizing on narrow opportunities, along with sales and marketing, are essential areas you simply can’t overlook.
Real Estate Accounting Regulations
The real estate industry involves complex transactions as well as unique financial reporting needs which requires reliable and robust accounting practices. Let us have a look at some of the important real estate accounting regulations:
Generally Accepted Accounting Principles (GAAP)
In the United States, the financial reporting of real estate transactions must adhere to GAAP, established by the Financial Accounting Standards Board (FASB). A framework for the presentation of financial accounts, revenue recognition, asset value estimation, and relevant information disclosure is provided by GAAP. Under GAAP, properties are typically recorded at their historical cost on the balance sheet. Over time, they are depreciated (except for land), which reduces their book value. However, GAAP does not allow for properties to be marked up to reflect increases in market value.
GAAP allows real estate companies to depreciate their properties over their useful life, which can help to reduce a company’s taxable income. However, land is considered to have an indefinite life and is not depreciated.
International Financial Reporting Standards (IFRS)
Under IFRS, investment properties can be recorded using either the cost model or the fair value model. The cost model is similar to GAAP in that it involves recording the property at its historical cost and then deducting accumulated depreciation and any accumulated impairment losses. The fair value model, on the other hand, involves ongoing revaluations of the property to its fair value at the end of each reporting period. Similar to GAAP, IFRS mandates that costs and revenues in the time in which they are incurred be equal. This covers charges for things like maintenance, real estate taxes, and loan interest.
According to IFRS, an impairment loss has to be recorded if the carrying value of an asset is higher than its recoverable amount. The higher of an asset’s market value less disposal expenses and its value while in use is the amount that can be recovered.
Compliance with Regulations with Real Estate Bookkeeping
Real estate investors should adhere to several accounting laws and tax regulations that are specific to their jurisdiction. The goal of compliance is to improve financial position while abiding by regulatory frameworks, not to avoid penalties or uncover loopholes.
- Understanding Tax Laws: As tax regulations of the real estate industry are different, it is imperative to comprehend the tax implications of different investment structures, income streams, and permissible deductions.
- Adhering to Local Regulations: Several municipalities or states have their own regulations which affect property ownership, land use, rent control, or tenant rights. It is important to stay informed with rules and regulations of the real estate market.
- Record Keeping: Maintaining accurate and clear records is not only practical for financial management but frequently a legal necessity. It’s important to meticulously document every transaction.
- Periodic Audit and Reviews: It is crucial to review financial records and perform period audits on a regular basis. This will not only ensure continuous compliance but also identify potential issues of your books.
Common Mistakes To Avoid in Bookkeeping for Real Estate
As per a report published by Fortunly, around 29% of real estate businesses run out of cash owing to cash mismanagement. To avoid the issue of mismanagement is to maintain error free and up to date books of accounts. Thus, it is extremely important for real estate businesses to maintain proper cash management in their financial records. Now let us have a look at some of the common mistakes which real estate businesses make in terms of bookkeeping:
Inadequate Record-Keeping
The challenge of maintaining precise records is not due to a lack of knowledge among real estate agents and investors but rather a shortage of time to devote to detailed record-keeping. In fact, back of the envelope, such calculations can be very time consuming for you, especially during the tax season when a tax receipt for a small amount has to be presented for verification in the event of an IRS audit.
Indistinguishable Business and Personal Transactions
Most of the real estate business owners have the common tendency to record personal and business transactions in a single account without marking them as personal or business. This makes the financial record very complicated in which business and personal transactions cannot be separated, obscuring the true financial performance of the business over a specific financial period.
Misclassification of Expenses
Majority of the real estate businesses have misclassified expenses especially when it comes with funds paid to freelance sales staff. Freelance sales people are commonly hired in the real estate market and businesses pay commission to salespeople after closing a deal. Also, in some cases, companies pay salary to the salesperson along with a commission. Having said that, real estate businesses have misclassified expenses in their books when it comes to payment made to freelance staff.
Poor Data Backup
Once more, we find ourselves at the beginning – if managing basic bookkeeping for real estate tasks such as backing up data or keeping scanned copies of receipts proves too time-consuming. However, in today’s digitally-driven business landscape, creating backups for essential data and maintaining digital versions of paper documents is crucial.
Releasing Funds Prior to Closing a Transaction
Releasing trust/escrow deposits to any party involved in a real estate transaction before its completion is not only improper but also more common than one might think. This money is not considered as commission until the deal is fully closed, which includes completing all necessary paperwork, registering the property, and handing over the keys. Premature distribution of these funds can lead to non-compliance with regulatory bodies for your brokerage. Additionally, any last-minute agreements that could reduce commission amounts would require reissuing checks, creating unnecessary work for your office’s bookkeeper or accountant.
Key Takeaways
Let’s face it. For individuals not familiar with the financial realm’s complexities, bookkeeping for real estate can seem quite complicated. Rectifying bookkeeping errors in the real estate industry is a continuous process, not a quick fix. It requires staying vigilant about evolving tax regulations, cultivating sound financial practices, and seeking professional assistance when necessary to ensure accuracy. Businesses have consistently seen the value in outsourcing bookkeeping services for real estate. By doing so, they capitalize on the knowledge and skills of experts who grasp the subtleties of bookkeeping, thus ensuring regulatory compliance, proper transaction categorization, adherence to tax requirements, and more.
Want to simplify your cash flow management? Click to outsource our expert bookkeeping for real estate services
Prev
