The
better your records, the more you can write off on your taxes. Then, if
you are audited, the more likely you are to be to keep your deductions . .
and your money.
Accountants and Bookkeeping Services
RHOL surveyed several bookkeeping service and
CPA firms a few years back. We found that the average cost for a typical
landlord with four or five units, from accountants familiar with the rental
housing business, is approximately $50 per month. That fee includes rent
deposits, about fifteen checks a month and preparing the schedule E for the
federal tax return. CPA firms charge about $150 per month for the same number
of units, but they also offer many other valuable services for serious
investors. As is probably obvious, these services are relatively
expensive for the owner of one or a few units. You also need to take
into account the time and trouble to interface with the service, phone calls
and/or visits to their office.
Doing It Yourself
Many small landlords still try to
keep books on slips of paper, and determine profits by how much money is
left in their pockets. Amazingly, some larger landlords do almost the
same thing, even in this day of computer assisted bookkeeping and tax
preparation.
Small-business operators sometimes keep track
of their finances in a slipshod manner because of what is certainly an
understandable, but perhaps misguided, attempt to keep government from
learning very much about their business. It has been our experience,
however, that landlords and property managers who keep good books and use the
deductions that are available to them do much better with the IRS and sleep
much better at night than those who don't.
There are still a great many incentives built
into the Internal Revenue Code designed to promote housing, and particularly
low income rental housing. Consequently, if real estate investors learn
the rules and take full advantage of the deductions and tax credits, they will
likely pay as little tax as those who try to circumvent the law and deal in
cash whenever they can.
Good books and legitimate tax returns will also
improve their chances of borrowing successfully and ultimately in obtaining
the highest possible price when disposing of it. These factors increase
the chance of leveraging themselves into real wealth. There is also less
chance of a devastating encounter with our friends from the government because
of some new
technological advantage to the IRS. Finally, documentation that
verifies the income and expenses of a property is important when you sell the
property.
Professional landlords and successful investors
who participate in this Web site probably understand the countless reasons for
having good records and instant access to detailed information about their
business. But mom and pops, the typical American landlords with five or less
units, often ignore this fundamental business principal. Consequently this
lesson is targeted to Mom and Pop.
Management accounting can actually be quite
simple. A basic accounting system only requires that you have a rent
roll, a maintenance log, a check register, and keep all bills and receipts.
Rent Roll
Create a simple form, either
on paper or in your computer, showing the building number, address, tenant
information, move in date, security deposit amount, rent amount and, if
applicable, the source of rent payments. We have included a sample of a Rent
Roll for you to compare or copy if you wish.
You are expected to have a receipt and deposit
system for your collected rents. If you are audited, the IRS is likely to want
to trace all your deposits. That means that they will want to know where all
the money came from and will want to know what happened to all the rents you
received, or should have received. For example, they may look at a
duplex where the rent is $500 a month. Your records show that one side
was rented for 12 months and the other side for 11 months. They may track the
deposits to see if you deposited 23 sets of rents, or $11,500. Any deviation
invites them to dig deeper. The better your records, the less IRS auditors are
likely to look for fraud or errors.
Maintenance Log
A record of tenant maintenance complaints and
the timely solution or resolution can save very expensive legal costs in the
event of accidents on rental property to tenants or their guests. There are a
great many other reasons for good maintenance records as well, including
evictions and the IRS.
There are various ways to construct your log.
One of us at RHOL uses printed two-part work orders and puts a copy of it in
the file for that building. Another property manager here uses a loose leaf
note book with a simple form for each building. Look
at an example
Check Register
A check register, with good detail, is about
all the actual bookkeeping that many small landlords need to do. Every check
should be coded, or contain the kind of expense that the check paid - when,
who, what for & why. Every deposit of income should
contain the same kind of information. Even if you don't deposit all of your
income, it is a good idea to note the cash income and what you did with the
cash in this same register, just don't carry the amounts over to your bank
balance.
If you think you need to keep track of cash in
a separate book, that's fine, as long as you actually write everything down so
that you can have an accurate picture of what is really going on in your
business. We all tend to loose track of cash, even substantial amounts.
Bills & Receipts
Pay your bills by check or credit card whenever
you can. That's pretty basic, and you probably do that already. However, the
problem arises when you pay for something with cash from your pocket. After
all, that $9.95 isn't worth charging or writing a check. WRONG!.
The reason for the check or credit card is that
you have both the receipt and the canceled check or credit card statement.
When you write a check, note what it's for on the memo line and always write
the check number on the receipt. Use the same credit card for business
purchases whenever possible.
If you can't resist, and pay by cash anyway,
write the relevant address and purpose on the receipt. A box of receipts may
become your most valuable asset in the event of an IRS audit, where you are
forced to reconstruct what happened two years or more ago. A dated receipt
also helps to show where you were and what you were doing if you need to
reconstruct a portion of your mileage log.
When an IRS auditor sees that you have all your
records in good order, with detail, and easily accounted for, they are likely
to do a cursory check and move on to someone else.
Computerize
There are now many good reasons to use
property management software that were not there just a couple
of years ago.
Primarily because everything about using computers has become much easier.
We believe that you can start using a powerful program to manage your
properties, tenants and finances without ever having to read a manual or
understand how it works.
Any landlord sophisticated enough to have found
us on the Web, has enough computer literacy to keep their own books and
prepare their own tax return using any of several good computer programs.
Quicken and TurboTax are two
inexpensive and very popular programs. Quicken is an accounting
program, published by Intuit, that anyone who can balance a check book
is capable of using without real training, because it works intuit-ively.
About half the world has discovered Quicken and their business upgrade QuickBooks.
They are the most poplar bookkeeping programs available.
TurboTax is a tax preparation
program, also now published by Intuit. Quicken and QuickBooks can export
data directly to TurboTax throughout the year, so users have a huge tax
planning, and later preparation, advantage. You can learn more about the
products by visiting the Intuit Web site.
There are certainly other good bookkeeping and
tax preparation programs available. You can check out the wide
selection available on our Property
Management Software page. When you become a member of RHOL we ask
you what kind of accounting software you use, if any, to help us plan our
services to members. Interesting, the most often listed, by far, are Quicken,
QuickBooks and Peachtree, along with various spreadsheets.
You will also note when you visit our Property
Management Software page that several landlords who had both computer and
accounting skills adapted Quicken to property management and bookkeeping
solutions for the small landlord. Some of them now offer property
management programs that utilize your Quicken data to vastly improve your
effectiveness as a manager, at relatively low cost.
Summary
You can use a pencil and paper with a few simple forms like a
rent roll, a maintenance log and a check register. You can do a good
bookkeeping job with an easy to use program like Quicken. The important
things is that you do something to maintain complete and accurate records.
