Common Rental Property Accounting Mistakes

Accounting mistakes in rental property as a landlord, you have many duties to take care of, such as evaluating potential tenants and handling maintenance requests. However, it can be easy to overlook the less thrilling part of the job, which is keeping track of financial matters. Nevertheless, if you desire your rental property business to be successful in both the near and distant future, being knowledgeable about your finances is crucial.

Common Accounting Mistakes in Rental Property Management

Why Separating Your Personal and Rental Property Finances is Important?

Using your personal bank account for rental property accounting may seem like an easy option, but it can lead to serious problems down the road. Mixing personal and rental finances in one account can cause issues with audits and freeze your personal finances. Furthermore, managing your rental business becomes much more difficult and time-consuming when you don’t have separate accounts. It’s better to keep your finances separate to save time and avoid potential issues in the future.

How to fix this to avoid accounting mistakes in rental property:

Accounting and bookkeeping for real estate transactions may be made simpler and less stressful by keeping your personal and company accounts separate.

Advantages your bank accounts should be separated:

• Reduces your tax burden and makes it simpler for you to report all of your legitimate expenses, which helps you save money.
• Reduces the time spent working on accounting since you can quickly determine if a charge qualifies as a business cost
• Protects your own money and keeps you compliant, especially because mixing security deposits with other cash is prohibited in several jurisdictions.
• Simplifies your accounting process as the volume of transactions grows, allowing you to grow your business.

Although the process of separating your personal and rental property finances may seem challenging, especially if you have been using the same account for a while, it is important to take action quickly. It is better to address the issue now rather than later, as it may take some time to get everything organized. Avoid waiting until your next tax payment deadline to begin the process of separating your accounts.

Neglecting to review your financial records regularly

Accounting tasks are not made simpler by procrastination. In fact, putting off bookkeeping until the last minute may result in missed deductions or inadequate paperwork that may cost you money. According to Nolo, “the average midlevel landlord (in a 25% tax bracket) pays an extra $25 in federal income taxes for every $100 in unclaimed deductions.”

Although $25 might not seem like much, let’s consider its value. 43% of our landlords have more than 10 years of experience in the rental sector, according to our most recent State of the Rental Industry survey. One of those seasoned landlords would have lost $2,500 if they had failed to collect $100 in unclaimed deductions each year for ten years.

Furthermore, if you anticipate owing at least $1,000 in income tax on your rental income, it is recommended that you make payments to the IRS throughout the year, according to Nolo. This can help prevent being surprised with a large tax bill in April. Generally, these payments are due on April 15th, June 15th, September 15th, and January 15th. If you do not regularly review your financial records, these quarterly deadlines can cause stress. Hasty accounting can lead to errors and can cause issues during an IRS audit.

How to avoid this:

Maintaining a regular check on your financial situation will help you retain more money. Home River Group suggests reviewing your rental property accounting on a monthly basis, but for best results, check it weekly if you can.

Failing to Keep Financial Records in Order

A 2018 study by Staples found that 75% of small business owners who were struggling or failing stated that lack of organization had a negative impact on their productivity. This is understandable, as disorganization leads to spending more time and money to solve problems that started small but became bigger.

As a rental property manager, the challenges are greater when it is difficult to find important documents quickly. For example, if a tenant needs to be evicted, the process will be more difficult if records of non-payment cannot be located.

How to avoid this wrong move to neglect accounting mistakes in rental property:

To maintain organization, Home River Group suggests keeping at least three separate files:

1. A file for managing tax codes and filing documentation
2. A file for recording capital expenses to offset capital gains taxes
3. A file containing all of your business bank statements

Failing to Utilize Specialized Accounting Software for Landlords and Property Managers

Consider using specialized accounting software specifically designed for landlords and property managers. These software options may offer features tailored to the unique needs of the rental property industry, such as the ability to easily track expenses, revenue and profits, and the ability to generate reports for specific properties with preset parameters. This can make the job of tracking and understanding your finances much easier and more efficient than using a traditional spreadsheet or generic accounting software.

How to avoid accounting mistakes in rental property: