Real Estate Accounting – 7 Things Agents NEED to Know (2023 Updated)

The thrill of closing deals, meeting new clients, and touring home after home are what excites new real estate agents
and reminds seasoned agents why they joined the industry in the first place. But beneath the allure of these activities
lies the backbone of any successful real estate agent’s business: accounting.

While not the most glamorous aspect of business, accounting plays a critical role in a real estate agent’s sustainability and growth. It’s the mechanism responsible for monitoring the financial health of any business, guiding agents through key decisions, and identifying potential pitfalls. Without a solid understanding of accounting, an agent risks mismanaging their finances, missing out on valuable deductions, and ultimately, struggling to keep their business afloat.

But it’s not all doom and gloom. When properly understood and applied, accounting is more than just a necessary evil, it’s a powerful tool that provides crucial insights, helps optimize operations, and serves as a compass navigating towards profitability and success.

For a real estate agent to succeed, it’s essential to grasp the critical aspects of real estate accounting, from understanding why it matters to leveraging its basic components and best practices. Whether a seasoned real estate professional or a newcomer to the industry, this guide will equip any agent with the knowledge and tools to transform accounting from an arduous task into a strategic advantage for any real estate business. Let’s dive in.

1. Why does it matter?

Real estate accounting might seem intimidating, especially when showing homes is more comfortable than crunching numbers. But ignoring this crucial aspect of the business can lead to serious financial missteps. Here’s why accounting should be a priority for every real estate professional.

Understanding Cash Flow

It’s easy to assume that cash flow basically boils down to closed deals. After all, a closed deal directly translates into a commission. But equating closed deals with financial success creates false perceptions of a business’ financial health.

Cash flow refers to all of the money coming into and going out of the business, and it’s a critical element to understand and monitor.

Negative cash flow – when more money is going out than coming in – can occur even when deals are closing regularly. For instance, investing heavily in marketing, paying high office overhead, and dealing with slow  commission payouts all
drain cash resources, offsetting even significant revenue.

By understanding cash flow, an agent can identify potential issues before they become significant problems. With a firm grasp of cash flow, agents can spot trends, identify areas to cut costs, and ensure there is enough capital to keep the business running smoothly.

Making Informed Business Decisions

Proper accounting does more than simply track money; it provides valuable data that informs business decisions. For instance, by analyzing income and expenses, an agent might discover that certain types of properties yield higher commissions or that specific marketing strategies offer a better return on investment. It could also turn out that too
much is being spent on office space relative to income, prompting a move to a more affordable location.

Armed with this kind of information, agents can make strategic decisions that improve profitability and business growth.

Planning for Taxes

Real estate professionals face unique tax situations. Between deductions, capital gains taxes, self-employment taxes, and more, there’s a lot to navigate. Misunderstanding or overlooking these issues can result in overpaying taxes or running into legal trouble with the IRS.

A solid accounting system helps keep track of potential deductions, like mileage, home office expenses, and marketing costs, ensuring agents don’t pay more tax than necessary. It can also help plan for taxes, so there are no surprises at the end of the year.

Moreover, understanding the tax implications of various real estate deals – such as flips, rentals, and wholesale deals – can help an agent choose the most tax-efficient strategies for their business.

2. Real Estate Accounting Basics

Before delving into the more complex aspects of real estate accounting, it’s important to grasp the basics. There are four foundational concepts every real estate agent needs to know:

The Chart of Accounts

A chart of accounts is essentially a financial organizational tool that lists every account in an accounting system. For a
real estate business, this could include accounts for different income sources (like sales commissions, rental income, or
consulting fees), various types of expenses (marketing, office supplies, travel), assets (properties, equipment), and
liabilities (loans, credit card balances).

The chart of accounts is the basis of every accounting system, allowing agents to track income, expenses, assets, and liabilities in a structured way. It’s also essential for preparing financial statements and tax returns.

Setting up a chart of accounts for a real estate business involves listing all the categories under which a business receives income or incurs expenses, and where the business owns assets or owes liabilities. Most accounting software can help set this up and easily modify it as an agent’s business grows and changes.

Income and Expenses

Income for real estate agents primarily comes from commissions on property sales and leases, but can also include rental income, consulting fees, or income from property flipping.

Expenses can encompass a wide range of items, including marketing costs, travel expenses, office overhead, professional fees (like licensing or membership dues), and cost of sales (like staging or home repairs).

Properly tracking income and expenses not only keeps books accurate but also provides insight into profitability and helps identify tax deductions.

Depreciation

In the context of real estate, depreciation is the decrease in value of a property over time due to wear and tear, age, or other factors. For accounting and tax purposes, this decrease in value can be deducted from income, potentially saving agents significant amounts on taxes.

Depreciation is a complex area of real estate accounting, as it involves understanding different depreciation methods and lifespans, plus it only applies to certain types of properties. But with a basic understanding of the concept and help from a real estate-savvy CPA, depreciation can be a powerful tool for a real estate agent.

Debt and Equity

Debt and equity are two key components of real estate financing that impact a business’ balance sheet. Debt represents money borrowed to finance real estate activities. This could include mortgages on properties, business loans, or credit card balances. Too much debt can pose a risk to an agent’s business, but used strategically, it can also provide opportunities to grow and expand.

Equity represents ownership interest in the business or properties. It’s essentially the value of assets left over after an agent paid off all debts.

Understanding debt and equity can help an agent make strategic financing decisions, manage risk, and understand the true value of their real estate business.

3. Best Practices for Real Estate Accounting

Real estate accounting can be complex, but adhering to some best practices can streamline the process and ensure an agent is making the most informed decisions possible for their business.

Keep Personal and Business Finances Separate

One of the first rules of any business – including real estate – is to separate personal and business finances. Using a business account for all transactions simplifies bookkeeping and makes it easier to track expenses for tax purposes.

Mixing personal and business finances leads to confusion, makes bookkeeping more complicated, and raises red flags with the IRS.

The separation between individual and business finances is known as the corporate veil as it is often thin line. Maintaining the corporate veil is essential for avoiding disallowed business practices and for protecting personal assets from business liabilities.

To maintain this separation, follow these tips:

• Open a separate business bank account and credit card.
• Use the business account for all, and only, business-related transactions.
• Pay yourself a salary or draw from the business account, rather than using business funds for personal expenses.

Regular Financial Review

A consistent financial review is crucial in real estate accounting. A monthly review of financial statements – including income statement, cash flow statement, and balance sheet – helps an agent keep an eye on their current financial situation and plan for the future.

In addition to reviewing financial statements, keep an eye on key metrics like gross and net profit margins, average days on the market, and return on investment for different marketing strategies.

Working with Professionals

Given the complexity of real estate transactions and the significant tax implications involved, working with a CPA or
other financial professional who specializes in real estate can be highly beneficial. They provide guidance, ensure an agent is taking advantage of all possible tax benefits, and help avoid potential legal complications.

When selecting a financial professional, consider their experience in the real estate industry, their knowledge of tax laws and regulations, and their ability to provide proactive advice tailored to your specific business needs. More on this later.

4. Choosing the Right Accounting Software

Running a successful real estate business involves managing lots of moving parts, including keeping track of complex financial transactions. Investing in a robust accounting software system can save significant chunks of time, reduce errors, and provide valuable insights into an agent’s business. But with so many options out there, how can an agent choose the right one?

Overview of Top Options

There are several high-quality real estate accounting software options that cater to the specific needs of real estate professionals.
Here are a few of them:

• QuickBooks: With modules tailored for real estate and a whole host of integrations with other tools, QuickBooks is the go-to accounting software for many businesses, especially real estate organizations.
• FreshBooks: Known for its user-friendly interface and robust features, FreshBooks offers expense tracking, invoicing, time tracking, and reporting. It’s designed to make accounting simple for small businesses, including those in the real estate sector.
• RealtyZam: Specifically designed for real estate agents, RealtyZam simplifies expense tracking and provides easy-to-understand profit and loss reports. The software offers a simple and intuitive way to track income and expenses, providing a real-time view of a business’s financial health.
• Pro-ledger: Provides comprehensive accounting features with a focus on real estate transactions. It offers a range of tools designed to help manage finances, including tracking income and expenses, generating detailed financial reports, and managing tax obligations.

Learn More

What to Look for in Accounting Software

When choosing accounting software, consider the following features:

• Ease of use: The software should be user-friendly and intuitive. An accounting degree shouldn’t be required for use.
• Integration: It should integrate seamlessly with other platforms in use, such as CRMs and bank accounts. This streamlines processes and ensures all data is in one place.
• Real estate-specific features: Look for features that cater specifically to real estate, like commission tracking or rental income tracking. This will help keep track of the unique aspects of a real estate business.
• Customer support: Good customer support can be invaluable, especially when dealing with complex accounting issues. Look for providers that offer robust support via multiple channels.

Choosing the right accounting software is a critical step in setting up efficient financial management for any real estate business. By considering these factors and options, an agent can select a solution that best fits their specific needs and helps their business run more effectively.

5. Finding a Real Estate-Specific CPA

While any accountant should be able to manage financial records and file taxes, a CPA who specializes in real estate can offer an invaluable level of expertise and insight. They have a deep understanding of the unique financial complexities and tax implications involved in real estate and can help optimize financial management and tax planning strategies.

What to Look for in a Real Estate-Specific CPA

Here’s what to look for in a real estate-specific CPA and the benefits they provide:

• Industry Experience: Look for a CPA who has extensive experience working with real estate agents and professionals. They should understand the intricacies of real estate transactions, including how to handle commissions, rental income, property sales, and expenses related to property management and maintenance.
• Tax Expertise: Real estate has unique tax implications and a real estate-specific CPA will be well-versed in these. They should understand the tax laws and regulations that apply to real estate and be able to help take advantage of all relevant deductions and credits.
• Proactive Advice: A good CPA won’t just reactively manage finances but will also provide proactive advice to help optimize financial management and tax planning. They should be able to suggest strategies to increase profitability and reduce tax liability.
• Good Communication: A real estate CPA should be easy to communicate with. They should be able to explain complex financial concepts in a way that’s easy to understand and be responsive to questions and concerns.

More than just a paid expert, a good real estate CPA should act as a business partner, interested and invested in the success of their clients.

Benefits of Working with a Real Estate-Specific CPA

Working with a CPA who specializes in real estate offers a number of significant benefits:

• Improved Financial Management: A real estate-specific CPA can help set up and manage financial records more efficiently, saving time and reducing the risk of errors.
• Tax Savings: With their deep understanding of real estate tax laws, a real estate-specific CPA can help an agent take advantage of deductions and credits that they might not be aware of, likely saving thousands.
• Informed Decision-Making: By providing accurate, up-to-date financial information and insights, a real estate-specific CPA helps an agent make more informed decisions about their business.
• Peace of Mind: Knowing that the finances and taxes are being handled by a professional who understands the unique aspects of their business provides peace of mind, allowing an agent to focus on other aspects of their business.

For example, a real estate CPA can help an agent understand how the IRS treats commission income, which is subject to self employment tax. They can also help navigate complex issues like depreciation recapture when selling a property, or passive activity loss rules for rental properties, saving money and making an agent both smarter and more valuable to their clients.

Questions for a real estate CPA? RealCount real estate CPAs work exclusively with real estate agents, brokers, and owners and have seen almost every real estate accounting scenario imaginable. Get your questions answered by a real estate CPA at RealCount.

6. Real Estate Bookkeeping

While accounting deals with the strategic and financial guidance of an agent’s business, bookkeeping is the process on which that guidance is based. While sometimes tedious, recording transactions accurately and consistently is critical, making the accounting process far more effective and reducing the likelihood of late fees and penalties.

During busy season and as an agent’s business grows, there’s often less time to accurately record transactions and more transactions to record. Some of the accounting systems mentioned above place this functionality at an agent’s fingertips via a phone app or website. These types of tools help record mileage, meal receipts, and travel expenses on the go.

Still, to ensure that nothing gets dropped, no receipts get misplaced, and no commissions go unpaid, many agents rely on a bookkeeper. Available as part time professional via platforms like UpWork or as an additional service with an agent’s real estate CPA, bookkeepers ensure not just that all transactions get recorded, but that they do so correctly and according to the chart of accounts.

Bookkeeping is the essential process that keeps accounting and financial forecasting accurate and helpful. Without reliable bookkeeping, agents are forced to make business decisions in the dark, often with undesirable results.

7. Final Takeaways

Accounting is much more than a necessary chore to keep the IRS at bay. It’s an essential component of a successful real
estate business. Understanding and properly managing finances can provide an agent with crucial insights, helping them make informed decisions, and ultimately leading to increased profitability and business growth.

Whether you’re a seasoned agent or just starting out, it’s never too late to improve your accounting practices. Start with the basics, such as understanding cash flow, setting up a chart of accounts, and tracking income and expenses accurately. From there, delve into more complex topics like depreciation, debt, equity, and tax planning.

Remember, keeping personal and business finances separate is not only a best practice but also a necessity. Regular financial reviews will help you stay on top of your business’ financial health, and working with a professional can provide valuable guidance and peace of mind (plus it’s tax deductible).

Don’t let the fear of numbers keep you from the success you deserve. Embrace real estate accounting as a tool for growth and let it guide your path to a thriving real estate business.

Other resources: We have guides on the ins and outs of the topics you need to know to be a successful estate agent (like where to buy real estate leads, real estate website builders, the best real estate lead generation companies, or a well designed real estate CRM). If you’re looking for more advanced topics like real estate ads, building your own real estate lead generation website, which real estate marketing tools you’ll need,  how to build a successful social media strategy, or even just real estate marketing ideas in general, you can try looking for a real estate mentor that can help show you the way.