Did you know that between 45 and 50% of property owners in the United States manage their own properties? Most of these landlords are in charge of the accounting and management of three rental properties.
Taking care of your rental property accounting comes with many perks, the main one being that you don't have to pay a bookkeeper's fee. However, accounting mistakes can have dire legal and financial implications.
If you manage your own accounts, make sure to avoid these four common rental property accounting mistakes.
1. Reactive Rental Property Accounting
The king of all rental property accounting mistakes is doing your accounting in reaction to extraneous situations. Whether seeing a pile of disorganized papers and files or something as serious as an IRS letter, these things shouldn't remind you that it's time to manage your books.
You need a regular, ordered, and meticulous process that tells you when and how to do your accounting. Software that regularly calls your attention to managing your accounts is the best tool to avoid this mistake.
2. Disorganized, Paper Documents
Accountants love paper trails, but it's even better to have a digital filing system for receipts and payments in the modern era. Switching to digital payment systems for your tenants is a more efficient way to receive and keep track of them.
If you do ever incur expenses that leave you with a paper receipt, get a scanning app that allows you to snap a PDF of the slip and send it to your accounting system immediately.
3. Tracking Expenses After the Fact
Postponing your tracking and recording of expenses to one day of the week (or month) is not a good idea. Instead, use your scanning app and other software to record your expenses in real time. This is beneficial because it prevents you from forgetting a cost you can rightfully pass off to the renters (if they're at fault) or deducting it from your taxes.
4. Incorrect Write-Offs
The other side of the coin touched on in the previous point is the practice of deducting an expense you weren't supposed to from your taxes. Texas State Law strictly prescribes the types of expenses and payments you're allowed to deduct from your taxes.
In addition to rental property taxes, you'll also have to pay income taxes for your rental income stream. Though you can deduct some of the expenses you incur as a landlord from these taxes, doing it negligently can land you in hot water as if deliberately trying to dodge taxes.
Find a Partner in Property Management
Since many landlords in the US do their own accounting for rental properties, you can learn many common accounting mistakes and lessons from them. The biggest mistake is doing your rental property accounting in an ad-hoc, reactive way. Your accounting process should be structured and regular.
Other common mistakes are keeping disorganized records, lagged expense tracking, and deducting incorrectly from taxes on rental properties. Avoiding these mistakes can take you far as a landlord. If you want to go even further, contact us today to help maximize your rental investment's potential.