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March 13, 2023

Real Estate Accounting Guide

Real estate accounting can be intimidating and overwhelming, especially for those who are self-employed or own small businesses. With the right approach, however, you can easily understand and manage your finances in a way that meets all legal and tax obligations.


But before you can begin creating financial documents or filing tax returns, you'll need to familiarize yourself with the basics of accounting principles and understand the difference between accounting and bookkeeping.

Accounting and bookkeeping are two related but distinct practices in the field of business management. Accounting is analyzing, recording, and reporting financial information for a business. This includes the creation of budgets, studying financial trends, and evaluating strategies for increasing profits or reducing expenses.

On the other hand, bookkeeping is primarily concerned with tracking transactions accurately and ensuring that all records are up to date. Bookkeepers must record all purchases, sales, payments, and receipts so that an accurate picture of a company's finances can be presented at any given time. While accountants can perform some bookkeeping tasks, they tend to focus more on analyzing data than entering numbers into accounts.

Real Estate Accounting

Real estate accounting is the process of tracking and recording financial transactions related to real estate transactions. It is an important part of any real estate agent or broker’s strategy as it helps keep accurate records of income and expenses and ensures legal compliance with relevant tax laws.

Real estate accounting also includes:

  • Keeping track of gross commission income
  • Tracking expenses and net income
  • Understanding projected tax liability
  • Gaining insights into business performance
  • Staying organized

For agents and brokers, real estate accounting allows them to gain better insight into their business’s health by having access to a full picture of their cash flow in one centralized system. This can help them make strategic decisions regarding managing their business.

Accurate information will enable investors to comply with local tax regulations, which help minimize the risk of being investigated by tax authorities due to faulty bookkeeping practices.

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The Basic Steps of Real Estate Accounting

Real estate accounting requires a great deal of precision and accuracy. It can be a complex process involving multiple financial strategies. Still, if you take the time to understand the basic steps and create a solid foundation, it can have tremendous benefits for your business.

Below are some of the fundamental steps when it comes to real estate accounting:

1. Choose an Accounting Method

Understanding the differences between cash and accrual accounting is important to ensure that the best option is chosen for your business. Accrual accounting allows for a more accurate financial assessment since it records expenses when they are due rather than when they are paid. 

If you have multiple entities operating within your business structure, it will be helpful to create separate accounts for each entity to report all of the transactions that occur accurately. Organizing your records into a journal system can help make auditing easier and more efficient.

Finally, keeping close track of your income statement throughout the year can help you remain aware of how well your business' finances are performing. This is important if you need to make adjustments to hit your targets.

2. Separate Personal and Business Funds

It's essential that business funds are kept separate from personal funds to avoid significant tax implications or even fraudulent activity. Keeping them separate will ensure that all financial data remains accurate and organized.

Additionally, creating separate bank accounts for each fund will help you keep track of all money flowing in and out of each account more easily. At the same time, creating a budget for each entity can ensure that the correct amount of money is allocated for taxes, bills, and other expenses.

3. Create a Chart of Accounts

Creating a chart of accounts is key in real estate accounting. A chart of accounts lists all the various income streams, expenses, and liabilities associated with running a business. By categorizing income and expenses into their respective categories, this chart allows you to track where your money is coming from and regularly going without having to comb through piles of receipts or manually input information into spreadsheets or other software programs.

4. Track Important Activity

Making a list of things you should be tracking throughout any given month or year as part of your financial strategy for property management companies is critical. This includes brokerage fees, overhead, costs for vendors for services like marketing, staging, and photography, and any outstanding balances owed. This list will save time when preparing taxes at the end of the year and provide you with quick access if ever audited by state authorities regarding compliance issues down the line.

5. Reconcile Your Accounts

A key element of successful real estate accounting is ensuring your account balance. Therefore, it is important to review your accounts and transactions in detail every month. This will allow you to keep close track of income and expenses and ensure that all entries are accurate.

Additionally, setting up automated reminders can be a useful tool to help ensure that your books are kept up-to-date at all times. Regularly logging into online banking systems or other financial management programs can also help you stay informed of all activity to avoid surprises when filing taxes or creating statements.

6. Organize Your Documents

Another step to keeping your finances organized is to keep documents related to your business organized and easily accessible. Develop a document filing structure that works for you and ensure that all relevant documents get filed away properly each time they're used or updated. This will give you a clear overview of all transactions related to your business.  

7. Create Accurate Performance Reports

Accurate financial reporting is essential for those managing a real estate agency. Through reliable performance reports that present a clear overview of expenses and income, including commission income, number of houses sold, days on market, sale price vs. list price, pending commissions, and sales volume.

These reports give you deep insights into how your real estate business is performing, and where you can invest in your business to improve your bottom-line performance.

Real Estate Accounting in Practice

Real estate accounting requires careful consideration and attention to detail. It is essential to maintain accurate records to ensure compliance with the law and better serve the interests of all parties involved in a property transaction.

Below are some best practices and common mistakes to avoid when it comes to real estate accounting.

Best Practices

Conduct a Monthly Review

When compiling a full accounting report, many elements should be considered. Comparing current financial results against prior ones is useful for assessing whether changes have been made over time and for recognizing potential red flags that need further investigation. It is important to review the supporting documents of any material transactions, such as leases or contracts, to ensure that all information is accurate and up-to-date.

A monthly review can help identify areas where improvement may be necessary to make the most out of any situation related to one's real estate investments or other activities. Through this practice, stakeholders can stay abreast of their profits and losses while increasing chances for improved performance over time.

Use Accurate Reporting Procedures

Creating a system for accurate reporting is essential for any organization. All financial information should be tracked, inventoried, and stored securely, with multiple layers of verification available to confirm the accuracy of the reports. It is essential to have measures that identify potential errors early on and provide an avenue for swiftly making any corrections. This can help avoid costly mistakes from being made due to negligence or carelessness.

Additionally, you should remain diligent when preparing reports, double-checking all entries and referencing source materials when necessary. For instance, if a transaction consists of multiple components, such as contributions from various individuals or entities, each part should be noted and considered accordingly. This can reduce errors significantly while ensuring compliance with local regulations.

Keep Separate Records

It is essential for businesses engaged in real estate transactions to keep personal funds separate from business accounts as much as possible. Doing so creates greater transparency when it comes time for tax season and can also help protect against potential fraud or liabilities due to incorrect bookkeeping practices. When dealing with large sums of money on both sides of the equation, it's especially important to separate personal funds from those used for business purposes to avoid confusion down the line.

Learn Local Requirements

Different jurisdictions have different tax requirements. Also, many real estate agents are legally considered self-employed, but there may be agency employees, and each has different income tax requirements. Along with federal income tax, you may be required to pay limited or full state income taxes.

As such, it's important to understand these requirements to ensure accurate reporting while avoiding fines or other mistakes caused by not staying informed. Researching regulations pertaining specifically to your area can help you remain compliant while protecting yourself financially and otherwise when engaging in real estate transactions moving forward.

Common Mistakes

Failure to Back-up Your Files, Data, and Other Records

One of the most important steps in real estate accounting is backing up your files and data. Not only does this help ensure you don't lose them if you experience technical issues, but it also gives you the ability to easily access past financial information for use in tax filings or legal proceedings. Because of this, it's imperative that all relevant documents are regularly backed up for future use. There are plenty of options to handle this for you, including real estate accountants or technology platforms with cloud storage.

Assuming You Can Lump All Expenses Together

When balancing your books as part of your real estate accounting practice, make sure to separate any expenses into their specific categories rather than lumping all costs together. This helps provide more accurate records that are easier for auditors or tax filers to review should there ever be a need for scrutiny. Ignoring this step could result in missed opportunities for write-offs or other benefits that wouldn't have been taken advantage of had individual categories been used.

Not Waiting for the Funds to Clear on Commissions

Commission checks are an important part of making a living as a real estate agent, but you can’t rely on those funds until they clear. Deals fall apart at the last minute for numerous reasons. If you have the money spent before it clears, you can harm your own cash flow.

Not Communicating With Any Invested Parties

Communication between different interested parties can often be difficult, yet it is an integral step in effective real estate accounting. Effective communication between your CPA, financial advisor, bookkeeper, and other financial professionals is crucial for ensuring that any changes in your business or finances are properly accounted for and managed to maximize your financial success. Taking the time to communicate early and often will save everyone involved time (and possible aggravation) down the line.

Start Improving Your Real Estate Accounting Processes

Overall, real estate accounting is an important aspect of operating a successful business in the real estate industry. Taking the necessary steps to ensure accurate and compliant bookkeeping practices will help avoid potential legal issues or financial losses moving forward. This includes regular auditing, implementing accurate reporting procedures, keeping separate records, researching local requirements, backing up files and data, separating expenses into their necessary categories, and communicating with all invested parties. With the proper care and preparation, real estate accounting can be much simpler than it initially appears at face value.