Effective accounting and tax planning are pivotal for success in the real estate industry. Tax professionals serving real estate clients must navigate unique financial landscapes, from managing irregular income streams to leveraging specific tax benefits. Implementing best practices in accounting not only ensures compliance but also enhances profitability.
- Maintain Accurate and Organized Records
Accurate record-keeping is the cornerstone of effective real estate. Tax professionals should advise clients to meticulously document all financial transactions, including income, expenses, and real-estate property tax.
- Separate Personal and Business Finances
It’s essential for real estate professionals to maintain distinct accounts for personal and business finances. This separation simplifies tax preparation and minimizes the risk of inaccuracies that could trigger audits. Encouraging clients to use dedicated business credit cards and bank accounts can facilitate this practice.
- Understand and Apply Appropriate Accounting Methods
Choosing between cash and accrual accounting methods significantly impacts financial reporting and tax obligations. The cash basis records transactions upon the exchange of cash, while the accrual basis recognizes income and expenses when they are earned or incurred, regardless of cash flow. The accrual method often provides a more accurate financial picture, especially for entities with substantial receivables or payables.
- Implement Regular Reconciliation Processes
Regular reconciliation of bank statements with internal records is essential for ensuring accuracy and swiftly spotting any discrepancies. This procedure is crucial in upholding financial integrity and generating precise financial statements.
- Leverage Tax Benefits through Cost Segregation
Cost segregation studies allow real estate owners to reclassify certain building components, accelerating depreciation deductions and reducing tax liabilities. By identifying assets that qualify for shorter depreciation periods, clients can enhance cash flow and achieve significant tax savings.
- Stay Informed on Tax Regulations and Compliance
The real estate industry is subject to evolving tax laws and regulations. Tax professionals must stay informed about changes that affect their clients, such as new reporting requirements or incentives. For instance, the Financial Crimes Enforcement Network (FinCEN) has implemented regulations to combat corruption, significantly impacting the real estate industry. These include the Beneficial Ownership Information (BOI) program, mandated by the Corporate Transparency Act, which requires corporations, limited liability companies, and many partnerships to disclose the actual individuals behind them. Compliance with the BOI program, which involves submitting the Beneficial Ownership Information Report (BOIR) form, is mandatory by Dec. 31, 2024.
- Advise on Appropriate Business Structures
Selecting the right business entity—such as an LLC, S-Corporation, or partnership—can have significant tax implications. Each structure offers distinct benefits and obligations, affecting liability, taxation, and operational flexibility. Guiding clients through this decision-making process ensures alignment with their financial goals and compliance requirements.
- Utilize Professional Development and Continuing Education
Encouraging clients to invest in ongoing education enhances their industry knowledge and can lead to better financial decision-making. Additionally, many educational expenses are tax-deductible, providing further financial benefits.
- Conduct Regular Financial Reviews and Audits
Periodic financial reviews and audits help identify areas for improvement, detect potential issues early, and ensure compliance with applicable laws and regulations. This proactive approach fosters financial stability and supports strategic planning.
- Plan for Taxes Year-Round
Effective tax planning is a continuous process. By monitoring financial performance throughout the year, tax professionals can provide timely advice, anticipate tax liabilities, and implement strategies to minimize obligations. This proactive approach prevents last-minute surprises and supports better financial management.
By implementing these best practices, tax professionals can help enhance their real estate clients’ financial health, ensure compliance, and optimize tax positions. Staying informed and proactive in accounting and tax planning not only benefits clients but also strengthens the advisory role of the tax professional.
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