Tax-Smart Real Estate Investing: A Bookkeeper’s Guide
By Gita Faust
Bookkeepers for real estate investors play an essential role and should help you save on taxes. As we serve the real estate industry, our team wears multiple hats, and we are regarded as their Advisor, CFO, Controller, Consultant, Coach, or Financial Manager. We guide them through the nuisances of real estate investing in the accounting world. As we offer top-notch service, some clients affectionately refer to us as their bookkeeper! We work hard to ensure all the numbers are correct so our clients can save money and be successful real estate investors.
Sound financial management can have an impact on your returns. Let’s explore some tax-efficient strategies and how they relate to bookkeeping, accounting, and financial management:
- Depreciation: Boosting Cash Flow
Think of depreciation like the way your toys lose value over time. When you own a property, you can pretend it’s losing value, too, and that’s a good thing! Depreciation helps reduce your taxable income. Tax Preparers play a crucial role in calculating and recording depreciation accurately in financial statements and tax returns.
As part of our bookkeeping and accounting services, we diligently track depreciation on the books, reducing the profit amount subject to taxes. Furthermore, you can incorporate depreciation into cash flow projections. This results in improved cash flow, affecting property values and taxable income.
- 1031 Exchange: The Tax-Saving Swap
Imagine swapping one of your toys for another without paying any tax. That’s sort of like what happens in a 1031 exchange. Real estate investors can sell one property and buy another similar one without paying capital gains tax immediately.
We record the exchange accurately to ensure taxes are deferred correctly for a seamless process. Simultaneously, the Tax Preparer is responsible for the transaction meeting IRS requirements, accurately recording the exchange, and reporting it on tax returns. This entails a strategic plan for the potential tax liability down the road and incorporating it into their investment strategy while maximizing liquidity.
- Passive Loss Rules: Accounting for Loss Limitations
Like you might spend money on toys, real estate investors spend money on their properties, including repairs, maintenance, and insurance. These expenses can often be deducted from the rental income, reducing taxable profits, and may encounter passive loss limitations.
The Tax Preparer needs to figure out the tricky rules about passive income and losses, especially when investors have multiple real estate investments that can help maximize allowable deductions. In doing so, you can analyze the impact of passive income and losses on overall financial performance and strategize to optimize their portfolios. It is like putting up a giant puzzle to get the finances right!
- Cost Segregation: Bookkeeping for Accelerated Depreciation
Cost segregation does not always require a formal study. I am correct; when you make improvements like replacing a roof, you must track these expenses in your books. Later on, when you review the report, you’ll find the purchase date and a separate line item for these improvements. Depending on the property’s value and complexity, you may consider opting for a formal cost segregation study. These studies are like a treasure chest for looking for parts (toys) of a property that can be depreciated faster.
The key is to record each line item in the books from the study, which will help you view the breakdown of past and expenses for subsequent years, saving time for the tax preparer. They can reconcile the reports and CS study to the depreciation schedule on the tax return.
- Real Estate Professional Status: A Tax Advantage
One of the qualifications is that you materially participate for 750 hours. If they meet specific requirements, they can be classified as “real estate professionals.” Investors must maintain accurate records of their real estate activities to support their claims.
This status can impact increased deductions and reduce taxable income. We all play an essential role in helping you open the door to tax benefits and achieve status. The more detailed the records, the stronger the case for those extra deductions. It’s all about teamwork and meticulous record-keeping.
- Rental Property Deductions: Accurate Accounting
Real estate investors can deduct various expenses related to their rental properties, including maintenance, repairs, and property management fees. Being detail-oriented is in our DNA. One of the most significant mistakes I have seen is investors and other bookkeepers not recording transactions that do not reflect on the bank statement. If you are an investor reading this, you know what they are.
Make sure every penny is accounted for to maximize profit and tax deductions. The only way you can achieve this is to track, categorize, and reconcile every day or week. Always check for accuracy by reviewing your reports every week. When you do it right, your financials for each property become apparent and will show your net worth in black and white.
- Entity Structure: Tax Efficiency in Bookkeeping and Accounting
As accounting advisors, we ensure that the financials are maintained within your chosen entity structure, which provides a smooth tax planning and filing experience. You should consult your tax advisor and attorney for the proper entity structure: LLC, corporation, or trust, and for tax planning and strategy.
It is a collaborative effort between you, your tax advisors, me, and my team to align with your goal as a real estate investor. Choosing the proper entity structure, such as an LLC or corporation, can impact tax liabilities and reporting requirements.
The Golden Rule in real estate accounting is helping you make smart, informed financial decisions, maximize profits, and find ways to save on taxes.
So, the important lesson here is that with the right team of bookkeeper, tax advisor, and legal professional, you as an investors can make smart money decisions, earn more money, and pay less in taxes. As a team, you can make your dreams come true!
Gita Faust is the founder & CEO of HammerZen, which helps businesses save time & money by keeping track of The Home Depot purchases and efficiently importing receipts and statements into QuickBooks. National REIA members receive discounts on QuickBooks services and software. Learn more by visiting www.hammerzen.com/nreia.
