Even some of the savviest real estate brokers can get trapped in the most common accounting mistakes.
There’s a similar thread of accounting mistakes woven throughout the real estate industry that creates challenges and complications come tax time. Many of these mistakes are financial oversights that end up causing complexity, and in some situations, extra expenses.
Below are the Top 5 real estate accounting mistakes and how to avoid them.
Incorrect Management of Financial Records
In real estate development, developers take out loans to fund construction projects, but mismanaged financial records can result in financial lenders canceling the loan and stalling or preventing the project. In an effort to thrive in the real estate market, tax returns must be polished and show clean financial records to verify a property’s cash flow. This facet of record keeping is important to secure a loan to expand your real estate portfolio. If you anticipate seeking a loan in the future, be advised that previous-year tax returns will drive the health of the loan. It is advised to reign in expenses and increase taxable income as you prepare to fund your project
Inaccurate Data Classification
Classifying data in real estate accounting can be a complex process and is a common area to make mistakes. The area of most confusion arises when deciphering between what classifies as a capital expenditure or what classifies as repair and maintenance. If not classified appropriately, this mistake sends a red flag that may result in an audit of your tax return, or may send the wrong message about capital expenditures. Seeking professional advice when major renovations are anticipated will ensure accurate classification, correct financial records, and tax efficiency.
Early Disbursement of Funds
As a best practice, it’s important to wait until the official documents have been signed and the keys have been handed over to disperse trust or escrow deposits to everyone involved in the transaction. Brokerage firms can be in non-compliance with their governing body because the money is not considered commission until the transaction is officially closed. Renegotiations happen all the time, and if the funds are already dispersed before the deal is closed and the commission amount changes at the last minute, disbursed escrow funds may need to be collected to fund the difference.
Tracking Commissions Separately
Tracking commissions separately from the accounting process creates redundant reporting efforts, reduces transparency and produces more work for everyone involved. In an effort to streamline commission tracking and enhance lucidity, merge commissions with the accounting process to clearly define how much is owed to agents when the sale check goes through.
Failing to Separate Business and Personal Accounts
Often times, a real estate broker may approach business in a personal manner and forget to separate business expenses from personal expenses. To maintain financial wellbeing, it is important to keep two separate accounts, as it will ensure efficient business processes and more accurate tax calculations. If the broker’s business is held in a separate entity (for example, in a single member LLC), keeping the business separate from personal affairs will ensure that the entity is respected in terms of liability protection.
BPW’s real estate department is well-versed in effective accounting strategies to minimize challenges and the costs associated with making unforeseen mistakes. If you have any questions or would like a review of your tax position, please contact me at email@example.com or (805) 963-7811.