The costs and benefits of property management are not always readily apparent to landlords. They don’t see the time and money that managers invest in their properties, but they do see rising monthly expenses. Accounting for your property management expenses is a way to help you understand the cost of managing your properties, monitor those costs over time, and optimize your return on investment by seeing how much profit you make from them.
Understanding these accounting concepts will also help you work more effectively with your property manager. Read this article to get an overview of common terms related to accounting for property management income and expenses, including which costs are considered direct vs. indirect expenses and what depreciation is as it relates to real estate investments.
Accounting for Property Management – Things You Should Know
What are Indirect vs. Direct Property Management Expenses?
Direct property management expenses are what you pay to directly manage and grow your property. For example, if you hire a property manager, the salary and benefits they earn are a direct expense of managing your property. Many indirect property management expenses are one-time costs that you may incur for things like repairs or upgrades to a property, or for marketing and advertising for your property. You generally won’t incur these expenses year after year.
Indirect expenses are typically non-cash costs that you may account for in your books as a prepaid asset or accrue as a liability until you actually incur the expense. For example, if you’re planning to hire someone to replace the roof on one of your rental properties, you don’t have to pay the roofer right away. You can accrue the cost as a liability on your books, and then pay it at a later date when the work is completed.
Depreciation for Real Estate Investments
Depreciation is an accounting method that allows you to recover the cost of an asset over a period of time. You may be able to deduct an estimated amount of depreciation for a property for financial reporting purposes, even if the property wasn’t acquired for the purpose of earning income. In the case of real estate investments, depreciation is used to account for the declining value of buildings, furniture, fixtures and other capital items over time.
As these items are used up and lose their value, you are entitled to offset that amount against your rental income to reduce your taxable income, thereby improving your overall financial position. The amount of depreciation that you can deduct depends on the type of property that you own. For example, you can use the straight-line depreciation method to account for the decline in the value of residential rental property over time.
Tax on Property Managers
Rental income is subject to state income taxes in Delaware. The amount of income tax that you’ll need to pay will vary based on your individual tax situation. The amount of income tax that you’ll need to pay on your rental property will be calculated based on the amount of income that you earn from the property.
For example, if you earn $40,000 in gross rental income and have an effective tax rate of 15%, you will have to pay $6,000 in state income taxes. The amount of income tax that you’ll owe on rental income varies based on your individual tax situation. The best way to determine the exact amount of income tax that you’ll owe on rental income is to create a rental income tax calculator. These calculators are very simple to use and will help you understand your tax liability.
Accounting for Repairs and Maintenance
If you incur expenses to repair or maintain a rental property, you can account for those costs in your books by listing them as an expense. You may prefer to list these expenses as a liability rather than an expense, however, if you can’t pay for the repairs or maintenance yet. On the other hand, if you are able to pay for the repairs or maintenance in a single year, you can list the expenses under a normal category, such as repairs and maintenance or property management.
You can account for repairs and maintenance in several ways: – You can record the cost of emergency repairs and maintenance in the year that they occur. You can record the cost of emergency repairs and maintenance in the year in which they are planned. For example, if you have to replace a water heater, you don’t have to account for the cost in the year that the water heater breaks down. You can account for the cost as a repair or maintenance expense in the year that you plan to replace the water heater.
You can record the cost of emergency repairs and maintenance on a deferred basis. If you don’t have the money to pay for repairs or maintenance when they occur, you can record the expense as a liability on your books. The liability can be paid off over time. This is typically done when the repair or maintenance work is expected to be completed in a year or less.
Accounting for Advertising and Marketing
If you spend money advertising or marketing your rental properties, you can account for those expenses in your books. You can record the amount spent as an advertising or marketing expense in the year that you incur it. Alternatively, you can account for the advertising and marketing costs on a deferred basis.
For example, if you agree to a three-year marketing contract, you can account for the annual expense on a deferred basis. There are a couple of ways that you can account for advertising and marketing costs: You can account for each marketing expense individually. For example, if you spend $300 one month and $500 the next, you can list each expense under the appropriate category in your books.
You can account for a lump sum of all marketing expenses in the year that they are incurred. For example, if you have a marketing budget of $1,000, you can list that amount as an expense in the year that it occurs.
Accounting for Agents’ Commissions
If you hire a real estate agent to list one of your rental properties for sale or to help you find a new tenant for one of your properties, you can account for the agent’s commission as a property management expense. Alternatively, if you are dealing with a tenant or a buyer, you can account for the commission as a liability in your books until the agent receives it. There are various ways that you can account for agents’ commissions:
You can account for each agent’s commission individually. For example, if you hire an agent to list one of your rental properties, you can record the amount they earn as an expense in the year that the property is listed.
You can account for a lump sum of all agents’ commissions in the year that they are incurred. For example, if you hire three different agents to help you list three different properties, you can account for the total amount that they earn as an expense in the year that you incur the expense.
Managing rental properties has its own set of accounting terms and practices. If you are new to property management, understanding these terms can help you make better decisions about how to manage your properties, and help you work more effectively with your property manager. To account for the expenses of managing your properties, you can use the following bookkeeping method: