Rental Property Accounting - two tips you cannot do without

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Tip 1: Set Up a Separate Checking and Savings Account Per Property

This is not a tough step but is crucial for the successful operation of this accounting system (or any accounting system). You will first want to set up a separate checking account for each property you own. If you own more than four properties, you have likely scaled out of this accounting system and need something more robust. Otherwise, you should be able to handle a handful of bank accounts.

The reason we want to set up a checking account per property is so that we can segregate income and expenses on a per property basis. We want to avoid co-mingling rental income and expenses with personal accounts or other properties. Note that the co-mingling issue becomes a legal case when you have business entities that hold property. For the purposes of this accounting system, avoiding co-mingling will simply make your life easier when it's time to reconcile everything and perform year-end accounting.

Personally, I have two distinctly separate checking accounts (complete with debit cards and check books) for my two rental properties. I make sure all income and expense items flow through the respective checking accounts. At year-end when it's time to compile my profit and loss statements, if I've done a great job at upholding the integrity of the sub-processes, it's very easy to quickly record my income and expense items.

Your checking accounts can be personal accounts, they don't have to be a business account (unless you are operating through an entity). Simplicity!

Why separate savings accounts? Accountants like to earmark my funds for various future expenses, such as capital expenditures. Another reason for opening up savings accounts could be to hold your tenant's security deposits. Make sure to check the local rules on holding tenant security deposits in order to avoid penalties from your local municipality.

Tip 2: All Income and Expenses Flow Through Your Property's Checking Account

I know I'm repeating myself, but that's how important this step is. Master the sub-process of segregating rental and personal expenses and your life will be easy. I promise!

Let me give you an example.

Early in your investing career, you wanted to keep things as simple as possible. You bought rental property and just had the income and expenses flow through to your personal account. You did a decent job of tracking everything in Excel and you know your process could be better but you are striving to keep things simple.

Related:Commingling Funds Can Sink Your Business

Now you own three properties and you hire a CPA to help you get organized and prepare your taxes. You haven't mastered the sub-processes of record keeping or segregating income and expenses. The CPA is appalled at your accounting system and charges you hundreds, maybe thousands of dollars to review your bank statements and segregate out your rental income and expenses to properly and accurately prepare your tax returns. A long time and a lot of money later, your taxes are prepared correctly and your CPA advises you to build out a more robust accounting platform.

Use one checking account per property and make sure all income and expenses flow through the property's checking account.

Relevant Information:

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