As you embark on your journey as a real estate agent, don’t forget about keeping track of the financials for your business. Because, oh yeah – you’re a business owner now!
For tax purposes, real estate agents are considered self-employed, which puts you squarely in charge of your income, expenses and taxes. That’s going to require some recordkeeping.
As a real estate agent, you probably need bookkeeping to track your money coming in and going out and to stay on top of your tax payments throughout the year.
In this guide, we’ll cover everything you need to know about bookkeeping for real estate agents, so you know your finances will be in good shape come tax time.
Why real estate agents need bookkeeping
You might not think official bookkeeping and accounting are important when you operate as a Business-of-One – after all, who’s checking your books?
But being a real estate agent involves some complicated financial stuff. And in any industry, running your own business has real tax implications that proper bookkeeping prepares you for.
A solid bookkeeping practice can help you:
- Keep track of your cash flow so you know when you can afford to hire help or take on new expenses
- Make sure all your bills are paid on time
- Stay on top of your tax payments
- Save money on your tax bill (or increase your tax return)
- Qualify for a loan or line of credit when your business needs it
Without clean records, you or your accountant will be scrambling at tax time to claim the right deductions and report your income and expenses.
Should real estate agents do their own bookkeeping?
Running a real estate business can come with complex finances.
This isn’t a straightforward service where you do work and get paid by a client. Even if you’re a Business-of-One, your finances can be quite involved and include an array of expenses, income and deductions that can quickly get complicated to track.
So…? You could do your own bookkeeping with software. But it could be time consuming and complicated, and you risk missing money-saving tax breaks or worse – making a mistake that flags you for IRS penalties in case of an audit!
If you’ve got an established business and you’re regularly earning an income as a realtor, consider getting help with your bookkeeping. Having a pro backing you up will make sure you’re keeping everything tidy and not missing out on anything that could save you money.
Best bookkeeping practices for real estate agents
Whether you do your books yourself or hire a pro, take these basic steps to keep your books clean. You’ll thank yourself come tax time!
Use a business bank account
As soon as you get into business for yourself – even if you’re operating as a sole proprietor – open a separate bank account for your business finances.
Use this account to collect income you earn from your real estate business and to pay any expenses you incur, including paying down credit cards you use for business expenses.
Don’t use this account to pay for personal expenses, like rent, groceries or entertainment. Instead, transfer money from your business account to your personal account to pay yourself, and use that account for your personal spending. (This is a little more straightforward if you’re an S Corp and paying yourself a salary, but you can apply the same practice without an actual business entity.)
Separating your business and personal finances is the single most important thing you can do to manage your business finances.
Why? Because it keeps your records clean.
At any point, you can look at your business account and know money coming in is business-related income, and money going out is a business expense. If you mingle your finances, you have to sort each transaction individually — and that’s just annoying, inefficient and ripe for error.
Track income and expenses
In addition to having a clean paper trail in your bank account, keep clear records of your income and expenses.
You can do your bookkeeping through software or a simple spreadsheet, depending on how complex your finances are. Here’s what you need to track to be ready at tax time:
- Income from commissions
- Realtor association fees
- Continuing education expenses
- Office supplies, equipment and software
- Website development fees
- Social media marketing expenses
- Advertising costs
- Cost of marketing collateral, like brochures and business cards
- Travel expenses.
Don’t delete transactions
Once you start using a software to track your income and expenses, be careful about how you manage transactions.
When you enter something into your books in the software, keep it there. If you made a mistake and something changes, make an official update to the line item and keep a clear note, so you have a proper record of the change.
Simply deleting or editing transactions has cascading effects on your records. Deleting a payment on an invoice, for example, sets the invoice back to unpaid, which messes up your accounts receivable (i.e. makes you think someone owes you money when they don’t!).
Check in monthly
If you use an accounting softwares, an online service like Collective or a hired bookkeeper, your books might pretty much take care of themselves. Automation is beautiful!
But you should still check in occasionally. Check in on your records about once a month to make sure anything that’s automated is running smoothly and that your books are reconciled with your bank account.
Get familiar with common reports
Whether you DIY or delegate, learn what these common business reports are for and how to read them:
- Balance sheet: This shows a snapshot of your company’s assets, liabilities and equity – like net worth for a business – to give you a picture of its overall financial health.
- Income statement: Also called a profit and loss statement (P&L), this shows your revenue and expenses over a period to help you understand how the company’s performing in a given quarter or year.
- Cash flow statement: This shows your actual cash coming in and going out so you know how much cash you have on hand at a given time. (Different from revenue and expenses, which might be recorded at a different time than when you receive or spend the money.)
Bookkeeping mistakes to avoid
Inaccurate or incomplete records could cost you big at tax time. Avoid these common mistakes to keep the books tight in your real estate business.
- Mingling personal and business finances. Mixing your business and personal income and expenses makes for messy books, and it can have legal and tax consequences. Keeping a separate bank account for your business lets the IRS know your business is a legitimate separate entity.
- Not backing up your records. Is all your income and expense information in one place? What if that software crashes or you can’t access that account? Regularly back up your records with a simple download to make sure they’re there when you need them.
- Lumping all your expenses together. Tell us you track your expenses as separate line items?! Don’t just note a lump sum for each month or quarter or – eek – year, because tax authorities treat each type of expense differently.
- Poor communication with stakeholders. Whether you’re working with employees or contractors, fellow agents or property investors, keep and share meticulous records of your business dealings with them. You don’t want someone knocking on your door at the end of January trying to figure out the commissions you paid them last June.
- Forgetting about estimated taxes. Estimate quarterly taxes for your business are due every April 15, June 15, September 15 and January. 15. Forgetting to pay them and waiting until you file your tax return could mean not only a surprise bill at the end of the year but also a slew of fees for late payment.
- Incomplete recordkeeping. Familiarize yourself with real estate tax deductions, and track your expenses throughout the year with the proper paperwork — i.e. bring receipts.
- Not consulting experts. Not every business owner needs to hire a bookkeeper. But for many of us, getting an expert involved can save a lot of headaches. They put in the time of tracking your finances, so you can focus on running your business. And they bring the expertise needed to keep all your financial ducks in a row and plan properly for taxes.
Real estate agent taxes
A key reason you need solid bookkeeping in your business is to keep all your financial information in order to prepare for filing and paying taxes.
Here are a few tips to prep your books for tax time.
Keeping up with tax regulations
How you report income and pay taxes as a real estate agent is all based on the tax regulations in your state and at the federal level. And, in case you haven’t caught the news lately, tax laws like to change… a lot.
Consult with an accountant at least once a year to check in on changes to tax laws that might affect your real estate business finances. They can help you make a tax plan for the coming year and let you know what to keep track of throughout the year.
With a relatively simple business, you might not need to invest in complex bookkeeping software. You could just track your expenses using a simple spreadsheet in a program like Excel or Google Sheets.
Tax deductions checklist
As you track expenses and fill out tax returns, make sure you’re claiming all the deductions you’re owed as a real estate agent. Here’s a handy checklist:
- Advertising costs.
- Auto travel and expenses (in miles).
- Office cleaning and maintenance.
- Commissions paid.
- Insurance premiums.
- Legal services.
- Professional services (e.g. accountant, assistant or marketing firm).
- Management fees.
- Bank fees and loan interest.
- Office supplies, equipment and repairs.
- Office utilities.
These could change over time. To get the latest list of self-employment deductions you can claim, grab the IRS Schedule E.
Bookkeeping services for real estate agents
As a business-of-one, you could manage your bookkeeping in one of a few ways:
- Hire a bookkeeper. Hire someone locally or virtually who does accounting for real estate agents. They’ll give you the most personalized service and bring strong expertise, and they’ll also cost the most of all your options.
- Accounting software. Software can help you keep track of your income and expenses yourself or work with a bookkeeper.
- Outsourced bookkeeping. A service — like the kind we offer at Collective — lets you offload some of your accounting work to pros without paying the steep fees of hiring a dedicated bookkeeper.
TL;DR: Get your books in order
Bookkeeping is an easy task to shove to the bottom of your to-do list — but it’s not something you want to leave until the last minute. It’s a vital part of running your own business as a real estate agent.
Like any business-of-one, you could DIY your bookkeeping through a system of spreadsheets or an affordable software. This would save you money and likely cost you time in exchange. It might also cost you in taxes.
As a real estate agent, your finances are more complex than the average business-of-one, so getting bookkeeping help early on in your real estate business could be a huge help. Bringing in some expert help can make sure your records are in order and help you claim all the tax breaks that are coming to you each year.
Want an affordable but comprehensive solution? Check out what we have to offer at Collective.