Understanding Accounting Essentials for Real Estate

Whether you manage a few long-term rentals, operate short-term rentals (STRs), or run a growing brokerage or property management company, the right accounting turns properties into a reliable portfolio. At Henriquez Accounting & Tax Services, we pair a disciplined monthly close with quarterly tax planning, depreciation strategy, and year-end filings—so you stay compliant, audit-ready, and profitable. Explore Bookkeeping, Tax Preparation, and Controller/CFO Advisory.

Real Estate Accounting Essentials (What to Get Right)

• CapEx vs. repairs: capitalize betterments/adaptations/restorations; expense routine maintenance. Create written thresholds and keep invoices/photos.
• Depreciation: track component lives and land vs. building allocation; record placed-in-service dates and Form 4562 workpapers.
• Cost segregation (when appropriate): identify shorter-life property to accelerate deductions—model cash-flow impact first.
• Basis & at-risk tracking: record original cost, improvements, debt adjustments, and passive loss carryforwards.
• Rentals vs. STRs: know how average stay, services, and participation can change the tax treatment.
• REPS/material participation: document hours and roles if you’re pursuing Real Estate Professional Status or STR participation tests.
• Entity & liability: coordinate ownership structure (LLC/partnership/S-Corp for ops) with banking, leases, and insurance.
• Clean tenant & escrow accounting: security deposits as liabilities; trust/escrow reconciled and separated from operating funds.

The Deal Lifecycle (How We Keep the File Clean)

Acquisition

• Record purchase allocation: land vs. building; loan costs; closing costs (capitalize/expense per policy).
• Set up fixed-asset subledgers and depreciation schedules; attach HUD/ALTA settlement statements.
• Place-in-service date confirmed; initial repairs vs. improvements documented.

Operations

• Separate bank/credit accounts; automate feeds with strict rules and vendor memos.
• Track rents, fees, utilities, management, maintenance; reconcile escrow/security deposits.
• For STRs: record platform payouts gross→net with cleaning fees, taxes, and refunds in a Merchant Clearing account.

Refi / 1031 / Sale

• Tie loan balances to statements; book costs properly (expense vs. amortize).
• Maintain adjusted basis roll-forward and gain/loss support; coordinate with legal/qualified intermediary for exchanges.
• Provide buyer/lender packages: rent roll, T-12, capex log, and reconciled statements.

Brokerage / PM Firms

• Trust/escrow three-way reconciliations; owner statements and 1099s.
• Commission tracking, pipeline reporting, and W-9/1099 workflow for vendors/agents.
• Sales & tourist tax mapping where applicable (STRs/cleaning fees).

Our Cadence (Month–Quarter–Year)

Monthly

• Reconcile operating, escrow/trust, and credit/merchant accounts; clear Undeposited Funds & Merchant Clearing.
• Close with P&L, Balance Sheet, Cash Flow; update rent roll and T-12.
• AR/collections cadence; AP batching with approvals; 13-week cash forecast.
• Attach invoices/photos to capex; update depreciation additions.

Quarterly

• Estimated taxes; review REPS/participation logs and STR occupancy metrics.
• Property KPIs: occupancy, ADR/RevPAR (for STRs), expense per unit/door, and maintenance ratios.
• Loan covenants/DSCR checks; reserve planning.

Annually

• 1099-NEC/1099-MISC; fixed-asset roll-forward and Form 4562 schedules.
• Return prep coordination (e.g., 1040 Schedule E; partnerships/corporations as applicable) and year-ahead planning.

KPIs We Track for Real Estate

• Occupancy and Average Days Rented (STRs: ADR, RevPAR).
• Operating margin per unit/door; NOI trends and variance to budget.
• Capex to revenue and maintenance cost per unit.
• DSCR, LTV, and cash-on-cash snapshot.

Common (Costly) Mistakes We Fix

• Treating improvements as repairs (or vice versa) with no documentation trail.
• Not separating land/building or tracking basis/at-risk—loss limits get messy.
• Security deposits recorded as income instead of liabilities; trust accounts unreconciled.
• STR platform deposits posted net (fees/taxes/tips buried) → margins look wrong.
• No participation logs for REPS/STR tests; missed opportunities or unsupported positions.

Recommended Stack

• Accounting: QuickBooks Online/Desktop; property tools like AppFolio, Buildium, or DoorLoop (where appropriate).
• Docs & receipts: Dext/Hubdoc with photo attachments for CapEx/repairs.
• AP & spend: Bill.com or Ramp with vendor approvals and W-9 tracking.
• STR: Airbnb/VRBO channel managers that export detailed gross→net data.

Pro Tip: Keep a simple CapEx log with date, property, description, vendor, amount, and photo. You’ll thank yourself at refinance, sale, or cost-seg time.

What You’ll Get When You Work With Us

• Clean, reconciled books—every month—including escrow/trust where applicable.
• Depreciation schedules, basis roll-forwards, and capex documentation.
• Quarterly tax projections and planning for REPS/STR considerations.
• Owner dashboard: occupancy, NOI, DSCR, and cash runway.
• Return prep coordination (Schedule E/business returns) and notice handling.

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FAQs

Is my rental a business or an investment?

It depends on your activity and services. We’ll review participation, average stays, and services to determine treatment and optimize planning.

How do I separate repairs from improvements?

Use written policies and the “betterment/adaptation/restoration” lens. We’ll set materiality thresholds and keep invoices/photos for support.

Do I qualify for Real Estate Professional Status (REPS)?

REPS is fact-specific. We’ll help you track hours/roles and assess whether your facts meet participation tests. If not, other planning may apply.

When does a cost segregation study make sense?

Typically when property size, hold period, and tax position justify the analysis. We model cash-flow impact before engaging specialists.

How should I handle security deposits and escrow?

Record as liabilities (not income), keep funds separate, and perform monthly three-way reconciliations if you manage trust accounts.

Ready for real estate books that stand up to lenders and tax time?

We’ll set clean policies, reconcile escrow, track basis and depreciation, and deliver decision-ready KPIs—month after month. Talk to an Enrolled Agent today. Schedule Consultation