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Accounting for Real Estate:A Comprehensive Guide​

Elevating Real Estate Businesses with Exceptional Outsourced Accounting Services

With the real estate industry having grown immensely in the past few decades, it has become essential for real estate professionals to understand accounting, at least at the fundamental level. Real estate is intricate, so the government imposes strict regulations on real estate to ensure your accounting is in order.

Therefore, mismanaged financial statements and paper trails can create immense problems and even result in criminal liabilities if you take one wrong step. This is why we at The Real Estate Accountants are publishing this blog to help you learn the basics of Real Estate Accounting Services.

What Comprises Real Estate Accounting?

Real estate accounting consists of recording and analyzing financial information of various commercial or residential real estate properties. This is similar to regular business accounting, but there are specific subtle differences:

Elevating Real Estate Businesses with Exceptional Outsourced Accounting Services.

Rental Income and Expenses:

Rental income is the payment you receive for the occupation of the property. It encompasses any money you receive from someone using or occupying your property and any value received in the form of services exchanged for the use of the property. The value of these services must be reported as part of your total income. Rental expenses are incurred for the maintenance and regular operation of rental property. These can be written off as a business expense.

If any property-related expenses are covered by the tenants, for example, the electricity or the water bill, and if these expenses are deducted from the rental payment, then it is mandatory to report these separately alongside the net income. Also, the cost of the bill can be deducted as a rental expense.

Property Depreciation and Appreciation:

When a property is rented out, the building is used to generate income. This is akin to a factory owner using the machines to generate revenue. Since the value of your property goes down or “depreciates” every year as you maintain it, the IRS allows you to subtract it from your taxable income. Therefore, you can pay a lower tax or even move down to a lower tax bracket, which benefits your business.

Contrarily, a property can appreciate when it gains value over time. This could be due to developments in the area, inflation, increased employment opportunities, or other factors.

You may also be able to spend money to improve your property’s value, which may be leveraged to make a profit when selling it or increase the rent based on increased market value. However, you will be subject to paying the Capital Gains Tax for a property that has appreciated dramatically.

Mortgage Payments:

A mortgage is a loan you take out to buy a house. But you don’t pay it all back at once. Instead, you pay it off in smaller amounts over time, along with interest.
Many beginners in house flipping start by getting a mortgage to buy a home. Then, they fix it up and sell it for a profit. But they need to sell it for more than what’s left on the mortgage to make money. So, flipping properties requires careful planning in practice.

It would help if you determined how much the mortgage and the renovations will cost. Now, you need to decide how much to sell the house for so you can make a profit. Therefore, flipping properties is best left to people with substantial money to invest upfront without needing a loan.