Imagine your friend asks for help keeping up with their finances. Now, you have to keep up with two sets of records.
This is what happens when you take on a rental property. There's so much information in front of you that you're bound to miss something.
Read on to learn five rental property accounting mistakes to avoid.
1. Having Only One Account
One of the first things you should do when you become a landlord is set up a separate account for your rental property.
This keeps your personal and rental transactions from getting comingled. It also makes your rental finances easier to report during tax time.
Not doing this can also come with legal repercussions. In many states, including Florida, each security deposit needs to go into an escrow account.
2. Not Knowing Tax Laws
Personal and rental property bookkeeping is important every day of the year, but especially during tax time.
There are rules regarding property taxes in Florida to know. You can't deduct rental income. You won't have to pay state income taxes but will have federal taxes and annual property taxes on your property.
Get a professional to fill in any gaps in your knowledge. Failing to comply with local tax codes can lead to penalties or leave you facing an audit. You may also miss helpful deductions that can help you keep more of your income.
3. Not Keeping Accurate Records
The most difficult part of rental property accounting is all of the paperwork, but it's also one of the most necessary.
Find a centralized location to store records of everything, including:
- Maintenance records
An audit becomes a headache if you can't readily produce records that the IRS is looking for. You also can't get tax deductions for maintenance costs if you don't have the paperwork to back them up.
They also serve as evidence if you have a dispute with a tenant who claims you didn't perform necessary maintenance.
Another mistake is to avoid the process of reconciliation with your records. This is when you compare two sets to make sure they're consistent.
This task is time-consuming but essential. Doing it every few months helps you spot and correct rental property bookkeeping errors early.
4. Not Having An Emergency Fund
Only 48% of Americans have enough money in an emergency fund to cover three months of expenses. 22% have no emergency savings at all.
There's no hard and fast rule about how large the fund should be. Try to set aside a portion of rent every month to cover emergencies such as unexpected major repairs.
5. DIY Rental Property Accounting
Managing landlord finances on your own leaves you at risk of making any number of mistakes.
Bookkeeping is only one of the many services of a property manager. They'll handle the books, offer landlord advice, and handle other tasks such as:
- Tenant screening and retention
- Rent collection
Property Management Goes Beyond Accounting
Rental property accounting mistakes include commingled accounts, tax errors, inaccurate records, and the lack of an emergency fund. Doing it alone is perhaps the worst mistake of all.
PMI Sunshine State has been providing full-service real estate management to the Sunshine State for nearly 20 years. Get started with a free rental analysis today.