Bookkeeping for Realtors: How to Find Clarity
Let's face it: you didn't get into real estate because you love crunching numbers. You became a real estate agent for the satisfaction of handing over those keys (and, of course, for those lovely commission checks).
But the truth is, mastering bookkeeping for realtors will help you keep more of your hard-earned money and save you a giant headache come tax season.
So, buckle up. You're about to learn everything you need to know about bookkeeping for real estate agents.
Why Bookkeeping for Realtors Matters (Even If You'd Rather Be Showing Houses)
Bookkeeping for realtors gets a bad rep because you typically don't have stable, guaranteed income in your real estate business. Most real estate agents have trouble effectively tracking their cash flow.
But good bookkeeping habits not only help you comply with tax laws. They also help you understand your business on a deeper level, make informed business decisions, and, ultimately, keep more money in your pocket.
Good bookkeeping helps you:
Track your income and business expenses
Identify which types of properties and clients are your real money-makers
Spot potential financial troubles before they snowball
Streamline your tax prep (because who doesn't want that?)
Qualify for a business loan
In other words, bookkeeping for realtors = taking care of your business's financial health. Start by cultivating these 5 good bookkeeping habits.
The Realtor's Bookkeeping Toolkit (AKA, What You Need to Get Started)
You don't need to be an accountant to keep solid books, but you do need the right equipment to do real estate accounting.
Accounting Software: If you're still keeping your receipts in a shoebox...no more! Invest in user-friendly accounting software like QuickBooks, Xero, or FreshBooks. These programs are designed with small business owners in mind and often have special features for the real estate industry.
Separate Business Bank Account: Mixing personal and business finances is a recipe for disaster. Open a separate checking account for your real estate activities. Your future self during tax season will thank you.
Business Credit Card: Same principle as the bank account. A dedicated business credit card makes tracking financial data much easier.
Receipt Scanner App: Apps like HubDoc or Dext let you snap a photo and categorize expenses in real-time.
Mileage Tracking App: As a realtor, your car is practically your second office. Apps like MileIQ or EverLance automatically track your drives so you can maximize your tax deductions.
It may take some time to get used to these new tools, but clear financial records are well worth it!
Getting Your Bookkeeping Organized
Now that you've got your tools, it's time to set up your chart of accounts.
Think of this as the organizational structure for your financial data. It might include categories like:
Income: Commissions, referral fees, open house hosting fees, etc.
Expenses: Advertising and marketing, MLS fees, office rent, vehicle expenses, professional development, client gifts, home staging costs, etc.
Assets: Business checking account, accounts receivable (commissions you're owed), office equipment, etc.
Liabilities: Debt, credit card balances, loans, etc.
This will look different for every business and real estate accounting process, but the goal is to have a clear, comprehensive view of your finances at a glance.
Income Tracking for Real Estate Professionals
As a realtor, your income is probably unpredictable - which is why it's essential to track it. Here's how to stay on top of real estate bookkeeping:
Record Every Commission: The moment you close a deal, record that commission. This gives you a real-time view of your earnings.
Categorize Your Income: Separate your earnings by type (residential sales, commercial leases, referral fees, etc.). This helps you identify your most profitable financial transactions.
Track Pending Commissions: Create a system for monitoring deals in the pipeline. This helps with cash flow projections and helps you make sure that your commissions don't slip through the cracks.
Reconcile Regularly: At least once a month, compare your records against your bank statements. This catches any discrepancies and keeps your books clean.
Again, if you're not keeping accurate records right now, this might take some time getting used to. Just do your best until income tracking becomes an automatic habit!
Expense Management: How to Keep More of What You Earn
As a realtor, you've probably got plenty of business expenses. The key is knowing what's deductible and tracking everything meticulously.
Common deductible expenses for realtors include:
Marketing and advertising costs
Office supplies and equipment
Professional fees (like MLS dues or continuing education)
Vehicle expenses (mileage, maintenance, parking)
Client gifts
Travel related to your real estate business
You can create separate expense categories for each of these in your accounting software. This makes tax time easier and helps you spot areas where you might be overspending.
Learn how Desi Tax® helped a realtor save $9,811 on taxes.
Personal and Business Expenses
As a realtor, the line between personal and business expenses can get blurry. That dinner the other night – was it a date or a client meeting?
The rule of thumb is that if the primary purpose of your expense was business-related, it's likely deductible. But (and this is a big but) you need to be able to prove it.
This is where meticulous record-keeping becomes your best friend in building a successful real estate business.
For mixed-use items like your vehicle or home office, you'll need to calculate the percentage used for business.
Keep a log of business miles driven and measure the square footage of your home office. These details can save you a lot of money come tax season. Here's a handy checklist of 10+ small business tax deductions.
Cash Flow Management
Ugh, cash flow management. One month you're rolling in commission checks, the next you're scraping by. Here's how to feel more in control of your financial management:
Create a Cash Flow Forecast: Use your accounting software to project income and expenses for the next 3-6 months. This helps you anticipate tight spots and plan accordingly.
Build a Reserve Fund: Aim to set aside 3-6 months of operating expenses. This cushion can keep you afloat during slow periods.
Negotiate Commission Advances: Some brokerages offer advances on pending deals. It's not ideal, but it can help bridge temporary cash flow gaps.
Diversify Your Income: Consider branching out into property management, commercial real estate, or even real estate investing to create more income sources.
Cash flow management helps you improve your business's overall financial health, which should always be your goal as an entrepreneur.
Getting Ready for Tax Season
As a real estate business, you're responsible for your own taxes. This means quarterly estimated tax payments and meticulous record-keeping. Here are a few tips to help with tax filing:
Set Aside Tax Money: When a commission check hits your account, set aside a portion for taxes. A good rule of thumb is 25-30% of your net income.
Pay Quarterly Estimated Taxes: Mark these deadlines in your calendar: April 15, June 15, September 15, and January 15. Paying on time helps you avoid penalties.
Track Tax Deductions Year-Round: Don't wait until April to scramble for receipts. Use your accounting software to categorize expenses and keep more of your money.
Understand 1099s: As a realtor, you may get 1099-MISC forms. Make sure these match your own income records.
Consider Professional Help: A good tax professional who understands the real estate industry can be SO worth it. They can help you maximize deductions and avoid costly mistakes.
A functional real estate accounting system helps you feel more confident about tax season and saves you money you didn't even know you had!
Common Bookkeeping Pitfalls for Realtors
Bookkeeping for realtors has a learning curve. Here are some common pitfalls and how to avoid them:
Mixing Personal and Business Finances: We've said it before, but it bears repeating. Keep your business and personal expenses separate, always!
Neglecting Reconciliation: Regularly reconcile your books with bank statements to catch errors or discrepancies for clean financial reports.
Overlooking Small Expenses: Those $5 coffees with clients add up. Track every expense, no matter how small.
Poor Record-Keeping for Mileage: The IRS loves to scrutinize vehicle expenses. Use a mileage tracking app and keep a detailed log.
Waiting Until Tax Time to Organize: Stay on top of your bookkeeping year-round. Set aside time each week to update your records to start seeing business growth.
Failing to Back Up Data: Regularly back up your financial data. Cloud-based accounting software often does this automatically, but it's worth double-checking.
Not Staying Current on Tax Laws: Tax regulations change often. Stay informed or work with a professional who is.
Accurate financial reporting may take time, but stay focused on your goals and learn about these 7 sneaky tax loopholes for small businesses.
FAQs
What Accounting Method Do Realtors Use?
This comes to personal preference, but many realtors use the cash-basis accounting method. With cash-basis, you record income when you receive it and expenses when you pay them. This method aligns perfectly with how most real estate transactions work, and it's pretty straightforward to learn.
Should You Use QuickBooks for Real Estate?
QuickBooks can be a great accounting software for many real estate agents. You can track commissions, manage transactions, and generate reports to keep your financial records organized. Other options are Xero and FreshBooks. Of course, all of this comes down to your personal preference. Ultimately, it doesn't matter what software you use as long as you're staying consistent with your real estate accounting.
Should I Hire a Bookkeeper?
If reconciling accounts makes you want to hide under your desk or if you simply want to spend more time closing deals than looking at spreadsheets, it might be time to hire a bookkeeper. They can free up your time, help you understand your numbers, and make better financial decisions.
Find Clarity with Bookkeeping Services for Realtors
The plain truth is, bookkeeping might not be the sexiest part of your real estate career, but it's important. Very important.
At Desi Tax, we offer monthly bookkeeping services both for taxes and payroll. Learn more!
