Accounts are prepared to determine a business’s profit/loss for the accounting period and to arrive at its financial standing. Real estate has complex regulations regarding accounting and taxation. Real estate Companies are answerable to several stakeholders who seek information regarding property value, budgets, debt coverage ratios, and profitability.    

Contents of the article

Here are the critical Financial Statements that have to be prepared by a Real Estate Firm:

1. Income Statement: It depicts the profit/loss for the period. It represents the revenue for the period and compares it to the expenses, hence arriving at profit/loss. The income statement, also called the Profit and Loss Account, is an essential statement that owners, lenders, investors, and stakeholders alike take keen interest in. It can be prepared quarterly, but it must be prepared annually for tax purposes.

2. Balance Sheet: Represents the company’s financial position at a point in time. It represents the value of the Assets & Liabilities. The assets of the firm are everything it owns, including short-term assets like accounts receivable, cash on hand, and long-term assets like construction equipment and properties. Liabilities represent everything the firm owes or the sources of funds by which the company acquires the assets, i.e., owners’ equity, profit retained in the business, loans from the bank, investors’ stake, etc. Liabilities also represent short-term liabilities like accounts payable, accrued expenses, and lease payable.

3. Cash Flow Statement:  The statement tracks the cash inflows and outflows from operating activities, financing activities, and investing activities. The cash flow statement is significant in the Real Estate Industry, with overlapping and confusing inflows and outflows related to rent, loans, and expenses. Although this isn’t important for taxation, it’s a crucial document for owners, investors, lenders, and other stakeholders. A business may be cash positive, even as it reports losses on its income statement, because of certain non-cash expenses like depreciation & amortization.

4. Statement of Owner’s Equity: Depicts variations in ownership over time, especially for LLCs and partnerships.

Apart from core financial statements, the real estate industry prepares several records to track expenses and property value, adhere to tax liability, and maintain solvency ratios.

E.g., Rent Roll: a summary of rental units, lease details, and rental income

Tax schedules: calculation of tax liability for the period, depending on structure and operations

Loan and Compliance documents: Prepared for internal reporting, as well as arriving at debt covenants that have to be reported to lenders

Depreciation schedules/depreciation accounting: details the value of an asset with wear and tear over a period.

Fun Fact about Depreciation Accounting in Real Estate:

The IRS permits you to depreciate a residential rental property over 27.5 years—but the catch is that it’s the building that depreciates, not the land it is on. Essentially, you are deducting a structure that could potentially be appreciated as time goes on. It’s one of the rare instances in accounting when your figures may decrease while your wealth increases!

Why is Real Estate Accounting important?

Accounting is key to running a real estate company, as operations are never just confined to acquiring properties, improving them, and earning lease rentals or sale proceeds. Every entity needs to conduct its bookkeeping activities and prepare financial statements for the operations to make sense. Here’s a brief explanation for the statement

1. Track profitability: A real estate company has to estimate project-wise profitability as well as consolidated profits. Profitability indicates the right acquisition strategy and sale price and validates the terms of various lease contracts. Ascertaining profitability ensures the efficiency of operations.

2. Informed investment decisions: Calculating asset capitalization, the return on capital employed, and turnover ratios like Asset Turnover ratios help an owner understand the quantum of investment into a firm and the returns earned, thus indicating the right blend of investment to maximize gains.

3. Loans & Investments: Understanding the cost of debt, i.e., estimated interest liability on loans borrowed, and the company’s solvency by means of debt and interest coverage ratios, helps both lenders and owners determine the company’s ability to repay debt. Comparing the cost of raising capital and potential returns estimated through forecasts presents the necessary information to make the right investment decisions.

4. Tax planning and Compliance: Taxation for Real Estate is elaborate and meticulous. Understanding nuanced regulatory compliance is crucial for taxation, which requires professional help to navigate. Calculating the tax liability as per the IRS and applying it is a regulatory requirement, making accounting a vital function.  

Now that we understand accounting is an indispensable part of business, we also need to understand the most efficient way to go about it. Having an in-house accounting team or hiring a full-time CPA is an expensive ordeal. Outsourcing your accounting needs is an excellent way to address your bookkeeping, accounting, and tax needs. Here’s why it makes sense to outsource your accounting needs.  

Why It Makes Sense to Outsource Real Estate Accounting

Think of outsourcing real estate accounting services as hiring a whole finance department—only smarter, leaner, and without the overhead and benefit costs. Managing books for multiple properties, tenants, and transactions is not an easy feat. Outsourcing real estate accounting offers innovative solutions to complex problems.

Here’s why Real Estate Companies are outsourcing Accounting:

1. Hiring full-time CPAs, bookkeepers, and support staff is expensive. When you outsource, you only pay for what you need, i.e., no payroll taxes, insurance, or benefits.

2. Real estate has stringent and complex rules, such as depreciation schedules, 1031 exchanges, lease accounting, etc. Outsourcing to experienced providers results in fewer errors, better reporting, and more innovative strategies.

3. Buying more properties? Adding partners? Outsourced teams are flexible and can scale with you, ridding you of the hassles of recruitment and training.

4. Outsourced accounting firms often use automated systems that reduce the scope for human error. With the right software and a proficient team, expect on-time closes, property-level reports, and real-time dashboards.

5. Property owners and developers should focus on Acquisitions, Tenant relationships, & Property value growth. Outsourcing frees leadership from spreadsheets and reconciliations.

6. Staying compliant with GAAP, IRS rules, and lender requirements is an ongoing task in the current tax environment. Finding an efficient outsourcing firm can help you stay audit-ready before the tax season.

Conclusion

Profitjets is reputed and trusted for outsourcing bookkeeping, taxation, and CFO services. It has 15+ years in the market and over 600 happy customers to back the claim. Get in touch with us to meet your comprehensive Bookkeeping needs.

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