Real Estate Investors Must Optimize This With Rental Income!
New York real estate investors, whether engaging in fix-and-flip projects or holding properties for the long term, must establish a well-structured chart of accounts. This foundational tool is crucial for tracking income and expenses, preparing tax returns, and enabling accurate budgeting and forecasting. A properly tailored chart of accounts not only simplifies reporting but also ensures that all financial activities align with business objectives and regulatory requirements.
Understanding the Chart of Accounts
A chart of accounts is essentially a categorized listing of all financial transactions for a business. It includes income, expenses, assets, liabilities, and equity accounts. For real estate investors, the chart of accounts should reflect the specific activities generating revenue, such as rental income, and the transactions being expensed, such as repairs and maintenance. It also needs to align with the requirements for tax reporting and compliance.
Fix-and-Flip vs. Long-Term Holding
NY Real estate investors typically fall into one of two categories: fix-and-flip or long-term holding. Each approach requires a different emphasis within the chart of accounts:
Fix-and-Flip Investors
Primarily focus on profit and loss accounts.
Key accounts include construction costs, renovation expenses, marketing, and sales revenue.
Tracking short-term expenses and profits is essential to gauge project success and profitability.
Long-Term Hold Investors
Place greater reliance on balance sheet accounts.
Rental income serves as the primary revenue source.
Key accounts include mortgage liability, depreciation, and long-term asset management expenses.
Entity Structure and Its Impact on the Chart of Accounts
The type of business entity under which a real estate investor operates significantly affects the required chart of accounts. Depending on each NY real estate investor’s business’s vision, mission and way of doing business will determine the full Chart of Accounts. The accounts listed below are essential for tax filing, however, are not all accounts that may be needed for the business.
Different entity types have distinct tax reporting obligations:
Single-Member LLCs or Sole Proprietorships
File taxes using Schedule E of the IRS Form 1040.
The chart of accounts should include these essential Cost of Goods Sold (COGS) categories outlined on Schedule E, such as:
Advertising
Auto and travel
Cleaning (note you should combine maintenance with repair because NY return TC201 has it this way)
Commissions
Insurance
Legal and professional fees
Management fees
Mortgage interest (reported via Form 1098)
Other interest (reported via Form 1099)
Repairs and maintenance
Supplies
Taxes
Utilities (should have subcategories for Water/Sewer, Gas, Electric)
Depreciation expense
Interior Painting and Decorating (this should be listed as Other but this needs to be added directly on NY return TC201)
Rental income
Multi-Member LLCs, Partnerships, or S-Corps
File taxes using Form 8825 (Rental Real Estate Income and Expenses of a Partnership or an S Corporation).
Required chart of accounts should include these essential Cost of Goods Sold (COGS) categories:
Advertising
Auto and travel
Cleaning (note you should combine maintenance with repair because NY return TC201 has it this way)
Commissions
Insurance
Legal and professional fees
Interest
Repairs and maintenance
Taxes
Utilities (should have subcategories for Water/Sewer, Gas, Electric)
Wages and salaries
Interior Painting and Decorating (this should be listed as Other but this needs to be added directly on NY return TC201
Depreciation expense
While there are similarities between Schedule E and Form 8825, there are slight variations. For example, Form 8825 includes wages and salaries, which are not part of Schedule E.
The Importance of Class Tracking
New York real estate investor bookkeeping can be complex and time-consuming without optimized processes. Relying on error-prone methods like Google Sheets, Excel, or pen and paper often lacks the necessary checks and balances to maintain accurate financial records. That’s why many New York real estate investors choose QuickBooks Online as their preferred bookkeeping software.
Managing multiple properties simultaneously is common for NY real estate investors. To track income and expenses efficiently, it’s crucial to organize data for accurate reporting, whether for taxes or internal financial analysis. A game-changing feature called Class Tracking in QuickBooks Online makes this process seamless. This feature is available with QuickBooks Online Plus and Advanced subscriptions. Currently, QuickBooks Online Plus allows for up to 40 classes, while QuickBooks Online Advanced allows for unlimited. QuickBooks Online Plus should be suffice for most NY real estate investors.
To enable Class Tracking:
Log into your QuickBooks Online account.
Upgrade to a Plus or Advanced subscription if necessary.
Click the Gear icon, go to Company Settings, then Advanced, and navigate to Categories.
Check both Track classes and Track locations.
Enable “Warn me when a transaction isn’t assigned a class” for better accuracy.
Leave the default setting as “One to each row in transaction.”
Click Done in the lower right corner.
Next, create a Class for each property in your portfolio. When recording income and expenses, assign the appropriate Class to signify which property the transaction is associated with. This simple step ensures your financial records stay clean, organized, and ready for reporting.
Class tracking is an invaluable tool for real estate investors, enabling detailed transaction categorization by property or project. By assigning each transaction to a specific class, investors can:
Itemize and analyze income and expenses per property.
Generate detailed reports for budgeting and forecasting.
Simplify tax preparation by ensuring that all necessary information is readily available.
Class tracking also enhances transparency and helps investors stay audit-ready by maintaining well-organized financial records.
Expenses vs. Cost of Goods Sold (COGS)
Property-specific expenses directly tied to producing a product or service should be classified as Cost of Goods Sold (COGS). Expense items listed on Schedule E or Form 8825 would fall under this category.
In contrast, indirect or general expenses that support overall business operations but are not directly tied to a specific product or service should be classified as Operating Expenses. These include costs such as hiring a marketing manager to oversee social media accounts, purchasing office equipment like printers and computers, and securing general business insurance, such as General Liability Insurance for your business entities.
Property-Specific Expense and COGS Tracking
This approach provides a clear picture of the profitability of each property and prevents the commingling of property-specific expenses with general business expenses. Key distinctions include:
Property-Specific Categories:
Advertising and pulling ads for a specific property
Rental income
Repairs and maintenance
Property management fees
Utilities specific to the property
Property insurance
Supplies such as towels, toilet paper, curtains, etc for a specific property
General Business Categories:
Advertising for the overall business
Office supplies
General business insurance such as General Liability, Errors & Omissions, etc
By separating these categories, NY real investors can maintain precise financial records that facilitate easy analysis and reporting.
Preparing for Year-End
A well-structured chart of accounts ensures a seamless year-end process. By aligning financial records with IRS requirements and maintaining comprehensive documentation, New York real estate investors can:
Streamline tax preparation and filing.
Avoid last-minute scrambling to organize financial data.
Reduce the risk of errors or omissions in reporting.
Staying Audit-Ready
Accurate reporting and meticulous documentation are crucial for audit readiness. Real estate investors should:
Retain receipts and invoices for all transactions.
Ensure that all income and expenses are accurately recorded and categorized.
Regularly reconcile accounts to identify and address discrepancies promptly.
By implementing these practices, investors can save time, reduce stress, and ensure compliance with tax regulations.
Conclusion
For New York real estate investors, a tailored chart of accounts is not just a tool for bookkeeping; it’s a strategic asset. Whether managing fix-and-flip projects or long-term rental properties, aligning the chart of accounts with business activities and tax requirements is essential for financial success. By prioritizing property-specific tracking, leveraging class tracking, and preparing for year-end reporting, investors can set their businesses up for long-term growth and profitability.
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