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A Complete Guide to Accounting For Real Estate Agents





As a real estate agent, you're familiar with plenty of financial concepts and adept at tackling challenging projects for your clients. But when it comes to your own business accounting and bookkeeping, it's a whole different story! 


Real estate agents are busy professionals who may not have the time or desire to dive into accounting optimization, but it's still an important aspect of your business. Proper accounting practices can give you an edge over the competition, help you plan accurately for the future, and set you up for success during tax season, all while saving you time.


In this complete guide to accounting for real estate agents, we will explore what you need to know, how you can optimize your accounting systems, and when to seek professional advice. By the end, you will be equipped to improve your real estate accounting and make a positive impact on your business.


Understanding Real Estate Accounting


Real estate accounting refers to the monthly and yearly financial tasks a real estate business owner must perform to keep their operations running smoothly. Whether you are an agent, broker, or investor, understanding real estate accounting is essential for running a successful business. Without proper accounting, real estate professionals may struggle to manage their finances effectively, leading to financial difficulties and potential loss of business.


One of the key reasons why accounting is important in real estate is that it provides you with a clear overview of your business' financial health. By tracking income, expenses, and cash flow, real estate professionals can assess the profitability of their business and identify areas for improvement. Additionally, real estate agents can ensure that they are meeting their tax obligations and avoid any penalties or fines.


We will also cover bookkeeping, an aspect of accounting that includes the specific tasks of record-keeping and tracking financial data. Good bookkeeping is a building block to good accounting, so it's crucial for making the most of your financial data!


Basic Accounting Principles for Real Estate Agents


1. Tracking Income: Commissions, and Other Income


Tracking income is a critical aspect of real estate accounting. For many professionals or business owners, income may be as straightforward as a salary amount. However, real estate agents generate income from various sources, including commissions, referral fees, bonuses, and other earnings. For many agents and brokers, up to 90 or 100% of income may be in the form of commissions. 


It’s important to remember that essentially all the money that you generate from your business activities, no matter what form it's in, is counted as income. 


Yes, this includes commissions, bonuses, and even gifts! Real estate agents should have a system in place to track each transaction, calculate the commission owed, and record when it's paid.


If you're splitting a commission with your brokerage, other agents, or an employee of yours, you'll need to count this income based on who received it:


➡️ If you receive the full commission, and then transmit an amount to someone else, you'll need to consider the full amount as income. Then, you can consider the amount paid to your team as an expense.


➡️ If you receive a small portion of a commission that has been handled or split by your brokerage or someone else, you only need to consider the final amount you receive as income.


2. Managing Expenses: Advertising, Office Supplies, and Travel Costs


Managing expenses is a crucial aspect of real estate accounting. Real estate agents incur various expenses in the course of running their business, including advertising and marketing, office expenses, travel costs, professional fees and licensing and education. Effective expense management ensures that business funds are used efficiently and in line with financial goals. It also ensures you can maximize your tax deductions.


Quick Tips For Tracking Expenses:


  • Use MileIQ for easy and accurate mileage tracking (Bonus: ReInvestWealth users get 20% off!)

  • Use separate bank accounts for your business and personal expenses.

  • Use accounting software that can auto-categorize your expenses to save time.


3. Managing And Organizing Receipts


It's important to keep and store all your receipts for business-related expenses. This is required in the case of a tax audit, and can also help you stay organized.

You're required to keep records like receipts safely stored for 6 years, so we recommend using a cloud-based storage system to avoid losing or damaging physical receipts. With a solution like Smart Receipt Shoebox, you can snap a quick photo of your receipts and save them virtually without a second thought.


4. Compliance 


Staying updated and informed of provincial and federal laws is one of the most important aspects of every business. It can also help your business for audit preparation. There are a few legal record-keeping requirements for real estate agents, including keeping all transaction records and descriptive information about your clients.


5. Regular Review of Financial Statements


Financial statements provide a summary of your business financial activities and can help real estate agents evaluate overall performance. Real estate agents should regularly review their income statements, balance sheets, and cash flow statements to identify trends, analyze profitability, and make data-driven decisions.


Ignoring financial data until tax-time is a trap that many real estate agents and other self-employed entrepreneurs fall into. Take the time to get familiar with what's going on in your financial records by reviewing your financial statements, understanding and planning cash flow, and watching out for any red flags.


Reviewing financial statements on a monthly basis is a good place to start, regardless of when you're expecting commissions.


6. Cash Flow Management


Cash flow refers to the movement of money in and out of a business, and effective cash flow management is crucial for real estate agents. By closely monitoring cash flow, real estate agents can ensure that they have sufficient funds to cover operating expenses, such as rent, utilities, and marketing costs.


Quick Tips for Real Estate Cash Flow Management:


  • Set aside a portion of each commission payment for taxes to avoid financial strain during slow periods.

  • Create a detailed budget outlining expected income and expenses to anticipate fluctuations in cash flow.

  • Establish a contingency fund to cover unexpected expenses or gaps in commission payments.

  • Maintain open communication with clients regarding payment terms and expectations to ensure timely receipt of commission payments.


Although real estate will always be a somewhat unpredictable business, it's important to avoid surprises or emergencies in your business. That's what cash flow management is all about. You may not be able to predict your exact sales or commissions, but you can: stay aware of your financial standing at all times, create safe buffers, and plan based on expected sales.


7. Tax Planning and Deductions for Real Estate Agents


Tax season can be a stressful time for real estate agents, but proper tax planning and deductions can help alleviate some of the burden. Real estate agents have specific tax requirements and can benefit from various deductions available to them.


Real estate agents in Canada are typically considered self-employed, which means that you will be responsible to report and file your own taxes. During the filing process, you will need to add up and categorize all your business expenses and determine any eligible tax deductions. Some common deductions include:


  • Home office expenses

  • Promotional costs and materials

  • Mileage and vehicle costs

  • Client entertainment costs (meals, gifts, etc.)


8. Accounting Software: Setting Up Your Accounting System


Now that you know about the most important aspects of accounting, it's time to put them into action with an accounting system. A structured framework will allow you to organize, track, and most importantly: use your financial information.


Picking the right accounting software is a key component of this, which will allow you to automate many accounting tasks, such as recording transactions, generating financial reports, and reconciling bank statements. By using accounting software, real estate agents can streamline their processes, avoid human error, and save time.


What To Look For In An Accounting Software For Real Estate Agents?


First and foremost, your accounting software should meet the specific needs of the real estate industry. It should have features and functionality that are tailored to real estate accounting, such as tracking commissions, managing rental income, and generating financial reports specific to the real estate business.


Secondly, the accounting software should be user-friendly and easy to navigate. As a real estate agent, you may not have extensive accounting knowledge, so the software should be intuitive and provide clear instructions and guidance.


Additionally, look for an accounting software that has automation features. Who wants to spend hours every week manually categorizing transactions? The answer is no one. So find an accounting software that takes the repetitive tasks out of your hands.


The best accounting softwares for real estate agents are typically the ones  that streamline tracking. Real estate agents are often on the go, and may have a variety of different income sources and expenses. By opting for simple automation and tracking softwares like ReInvestWealth, you can simplify your accounting to the maximum.


Common Mistakes in Real Estate Accounting


Sometimes it's easier to hear what NOT to do, which is why we've compiled a list of common mistakes that you can avoid while setting up your accounting for real estate. Avoiding these simple things will help get you on the right track:


  • Mixing personal and business finances: As a self-employed real estate agent, it may be easy to mix personal and business spending. This can make it significantly harder to stay organized, and leaves an administrative nightmare during tax season. Open a dedicated business account as soon as possible!

  • Neglecting consistent bookkeeping: Don't leave all the work until the end of the year! A strong accounting software and a monthly review can do wonders.


  • Not making a budget at all: If you're just waiting for your next commission payment, it can be tempting to avoid budgeting at all. In fact, the opposite is really the way to go! In a fluctuating business, staying on top of your budget is crucial.


  • Misunderstanding your contractors: Do you work with contractors? Partners? Employees? It's important to correctly classify any colleagues, especially if you will be paying them.


Conclusion


Getting your accounting organized as a real estate agent can make a huge impact on your business, time, and even stress levels. Not to mention, you'll be able to optimize your tax deductions for the maximum amount of savings!


ReInvestWealth is designed to help real estate agents streamline their processes and offers all the features you'll need to optimize your finances completely. You can get started and integrate directly with your bank account at 50% off for 24 months!




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