Top 5 Real Estate Accounting Mistakes
Even if you’re a savvy real estate broker, you might get tricked by some of these accounting mistakes. Not only do these mistakes cause challenges at tax time, but they might also create extra expenses on your part.
What are the top mistakes and how can I avoid them?
Here are the top-five real estate accounting mistakes we’ve seen developers and property managers make.
Financial record mismanagement: In many cases, real estate developers take out loans to fund projects. Mismanaged financial records could cause you to miss a loan payment, resulting in a canceled loan or project stall. To avoid this, ensure your tax returns can verify a property’s cash flow.
Data misclassification: The most common mix-up in this area is the difference between what is a capital expenditure versus a repair and maintenance expense. If misclassified, a red flag could be raised causing an audit of your tax return. When major renovations are on the horizon, speak with us to ensure classification accuracy, correct financial records, and tax efficiency.
Early funds disbursement: Before dispersing trust or escrow deposits, wait until official documents have been signed by all parties and the keys have been handed over. If done before the transaction is officially closed, brokerage firms may be in non-compliance with their governing body. Also, negotiations change. If the funds are dispersed and the commission amount changes, disbursed escrow funds may need to be collected to fund the difference.
Redundant reporting: If commissions are tracked separately from the accounting process, redundant reporting could occur. Rather, merge commissions into the accounting process to clearly define how much is owed to agents.
Mixing personal and business accounts: It’s important to keep agents’ business and personal expenses separate. Not only does it help with more accurate tax calculations (and possibly increased tax deductions), but it also ensures efficient business processes and increases liability protection.
MHCS’s tax and accounting professionals can help you weed through the real estate accounting minefield. Schedule an appointment today before you make one of these costly mistakes.