Are you scrambling to put together your real estate tax deduction Software at year-end? How about being confused about which expenses qualify for a tax deduction or how to keep track of your receipts? If so, you aren't alone. Keeping track of your real estate expenses can seem like a full-time job.
However, proper documentation and records are crucial to support the expenses you claim on your tax return. This makes separating business and personal finances an integral component of running a successful real estate business.
In this article, we'll discuss why separating business and personal finances is important and suggest five strategies to help you properly keep track of your expenses.
Why is Separating Business and Personal Finances Important?
Real estate agents are running a business. This means you are eligible to take expenses to offset your income, like commissions. Keeping qualifying expenses separate from your personal finances helps you pick up every qualifying deduction at tax time. For example, it's easy to forget whether a meal was personal or with a client. With the right documentation and procedures, you can be sure you are deducting all qualifying meals.
Separating business and personal finances is also important to protect your liability shield. Real estate agents with a Limited Liability Company (LLC) or other formal company set up and run their business separate from their personal finances. This means if you were to get sued, the courts could only come after your business assets. However, if the courts see you commingling business and personal expenses, they may be able to pierce your liability shield and seize your personal assets.
5 Ways to Separate Business and Personal Finances
There are a variety of strategies you can use to separate business and personal finances as a realtor. Let's cover five of the top strategies:
Open a Separate Bank Account
One of the easiest strategies is to open a business bank account. This account is separate from your personal accounts and will only hold business-related transactions. For example, your commission checks and any corresponding expenses will run through this account. When year-end rolls around, you can simply pull bank statements to put together your expenses. Even better, you can link your bank account to a realtors accounting software for automatic expense tracking.
Know Which Expenses Qualify
Next, it's important to know which expenses qualify. Understanding which business expenses are deductible helps you maintain the proper separation between your business and personal finances. For example, if you track mileage, you aren't able to deduct gas. This can help you avoid double-dipping on deductions and putting yourself in a tricky position with the IRS and state agencies. Remember, a qualifying business expense is one that is ordinary and necessary, meaning the cost is common for your industry and helps you run your business.
Leverage a Real Estate Agent Expense Tracker Program
Leveraging a real estate expense tracker is one of the top strategies to ensure separation between business and personal expenses. Using an expense tracker program gives you insights into how much you're spending and allows you to upload receipts to support your tax deductions. When looking for an expense tracker program, be sure the provider offers a comprehensive dashboard, report generation features, and a mobile app for convenience.
Keep Proper Documentation
Documentation is non-negotiable to support your expenses. If the IRS or a state agency were to audit your return, they would request receipts, invoices, and other proof of the expense. Bank or credit card statements do not qualify as substantiating documentation. For every expense you claim, be sure you have a receipt stored away.
Consult with a Professional
If you are unsure whether an expense is business or personal, consult with a professional. Certain deductions, like travel, can be confusing, especially if there are both personal and business components. Maximizing your real estate tax deductions relies on claiming all available deductions. Make a list of questionable business expenses and let your tax accountant sort through them.
Summary
Separating business and personal finances doesn't have to be daunting. In fact, equipping yourself with the right tools, like a real estate agent expense tracker from Agent Xpense, can take a majority of the recordkeeping burden off your plate. Reach out today to learn more about Agent Xpense and how it can help you properly separate your business and personal finances.
