This real estate investing bookkeeping tip is a cool one.
In my Real Estate business, I’m a huge fan of having immediate access to information – especially financial data.
I love the ability to pull a quick report on ‘how much I paid in property management costs’ for any given time period as an example.
It’s especially important that you have your bookkeeping expenses categorized not only for your own reports and information but for your joint venture partners and CRA (Canadian Revenue Agency).
Real Estate Investing Bookkeeping Tip #33 – What Categories?
There are three kinds of expenses in business: direct, indirect and personal.
Sometimes investors make the mistake of thinking they do not need to list and categorize “obvious expenses” that may not fall under the Direct Expenses heading.
Being lazy at the beginning of your Real Estate business will cost you later … and, may even cause you to miss important real estate investing bookkeeping expenses.
A commonly missed expense is property management because new investors do the property management themselves when cash flow is at a minimum.
However, this should always be factored into your expenses because you will eventually want to hire an outside company to do it for you.
You won’t be surprised by the extra hit to cash flow when you do.
Direct Expenses:
These expenses may include things like:
- Property taxes
- Insurance
- Property Management Fees (paid to third parties)
- Mortgage Interest
- Repairs and maintenance
- All related expenses tied to the property (such as condo fees etc.)
[thrive_text_block color=”note” headline=”Just a quick note on the Mortgage interest deduction:“]
You are only allowed to deduct the INTEREST portion, not the principal portion.[/thrive_text_block]
Indirect Expenses:
These are real estate investing bookkeeping expenses used to earn income.
They include a home office, cell phones, car expenses, courses, education improvement and so on.
Keep in mind you must justify your reasons why these had to be purchased or they may be disallowed.
Two tips come to mind here: real estate courses and personal coaching/development. With courses, they are more than likely to be allowed. But in the odd case, it may have to be amortized over several years instead of a Capital Expense.
With personal coaching, if it’s not agreed that it is direct business coaching, this could be disallowed as well. – best to check with your accountant as to how you should
It’s always best to check with your accountant as to how you should categorize this area.
Either way, it’s not worth the effort to pay professionals and ‘prove’ the expense was legitimate in my mind.
Personal Expenses
Huge areas of mistakes lie within claiming car expenses when you are using your vehicle for business.
Only the portion of expenses you use for business purposes are allowed of course – and, I would error on the side of caution recording in detail every trip made for business. There are even GPS devices that will do this for you.
Basically, at the end of the day, it is your job to document every legitimate expense and make sure your expense fits the deduction.
One of the best ways to keep things clear and categorized is with accounting software like QuickBooks.
[thrive_text_block color=”dark” headline=””]Here is a great post about using QuickBooks [/thrive_text_block]
The preceding has excerpts from 81 Financial and Tax Tips for the Canadian Real Estate Investor: Expert Money-Saving Advice on Accounting and Tax Planning
Do you have a question about expenses, what’s allowed or disallowed? Post them below!!!