Real estate accounting isn’t everyone’s cup of tea, if you ask us. Keeping track of property costs, rental income, tax breaks, and all the rules can be tricky, especially if you’re not on top of the numbers. Even people who have been in real estate for a while can encounter accounting mistakes that reduce profits, lead to audits, or result in costly errors.
A big issue is that many think basic bookkeeping is enough, only to find out too late that real estate requires careful attention. Mistakes such as mislabeling expenses or forgetting to track depreciation can become significant problems, and the CRA won’t overlook these errors.
But staying clear of these issues is simpler than you might think. With the right approach, you can keep your finances in order, make the most of your tax deductions, and avoid audits. In this guide, we will point out fifteen common real estate accounting mistakes and offer easy tips to help you keep your records tidy and hassle-free.
15 Most Common Real Estate Accounting Mistakes
Keeping track of your finances is crucial in the fast-paced real estate world. Even professionals sometimes make mistakes in their accounting, which can lead to wasted time, money, and stress.
Let’s explore the fifteen common accounting mistakes people in real estate often make. We will talk about how to avoid them with some simple tips.
Mixing Personal and Business Finances
Mixing your personal and business money is a common and risky mistake in real estate. It usually happens when they use the same card or bank account for personal and property expenses. It might not seem like a big deal at first, but things can quickly get out of hand.
How to Avoid
- Set up separate bank accounts and credit cards for your real estate investments. That way, tracking where the money comes from and goes is simpler.
- Use good accounting software to mark each transaction with its purpose and related property.
Misclassifying Expenses
So, the Canada Revenue Agency (CRA) sees repairs and improvements differently when it comes to taxes. Repairs can be written off right away, but improvements? Those have to be spread out over time. Messing this up could mean you miss out on deductions or get penalised.
How to Avoid
- Review what the CRA says about repairs versus improvements.
- Consult a tax expert to ensure you’re categorising things correctly.
- Keep good records for each type of expense. Think of invoices and detailed notes on what was done.
Inadequate Tracking of Expenses
The CRA lets people who invest in property deduct work-related costs. But if you don’t keep track of these costs well, you might miss out on deductions and mess up your tax reports.
How to Avoid
- Start using a system that works with your accounting software to track costs.
- Keep all your bills and invoices in order. Consider using apps that allow you to track costs easily while you’re out and about.
Poor Record Keeping
You could run into tax trouble if you don’t keep good records, especially if the CRA audits you. Without proof of your expenses, you might not get all the deductions you deserve or might even get penalised.
How To Avoid
- Go paperless. Save receipts and invoices online.
- Write down everything, essential details like property costs.
Failing to Reconcile Bank Accounts
If you don’t regularly check your bank accounts, you might miss transactions or find mistakes that mess up your financial reports and tax returns. The CRA wants accurate reports, so if your books don’t match your bank statements, that’s a red flag.
How to Avoid
- Check your bank accounts every month.
- Look for mistakes and fix them as soon as possible.
Overlooking Property Depreciation
Depreciation lowers your property’s taxable value, saving you money on taxes. The CRA wants you to track property depreciation carefully to stay compliant and avoid penalties for wrong tax filings.
How to Avoid
- Ask your accountant to set up a depreciation schedule for your properties.
- Depreciation should be calculated based on the property’s eligible components, such as the building and major appliances.
Not Tracking Capital Improvements
Unlike regular repairs, capital improvements must be depreciated over time. The CRA wants these improvements tracked separately for tax purposes.
How to Avoid
- Keep detailed records of all capital improvements, including what was improved and the cost.
- Don’t mix these expenses with regular repair costs.
Inaccurate Tracking of Mortgage Escrow Activity
Escrow accounts pay property taxes and insurance; mistakes here can cause missed payments or tax penalties. The CRA looks closely at mortgage payments, including escrow, so that errors can be costly.
How to Avoid
- Check your escrow account often to make sure it matches your mortgage statements.
- Compare escrow activity with property tax and insurance records.
Early Funds Disbursement (Trust/Escrow)
If you release funds from escrow before a deal is complete, you break trust rules and make the CRA unhappy. They can fine you for messing this up.
How to Avoid
- Don’t release any money until you’re sure all the deal conditions are met and checked.
- Always get written permission before releasing any funds.
Reporting That Doesn’t Match or Is Repeated
If your reports aren’t consistent or you repeat info, it’s hard to see how things are going. The CRA might ask questions if they see problems or wasted time in your financial reports.
How to Avoid
- Use the same form for all real estate deals, so income and costs are sorted the same way each time.
- Use software that follows CRA rules and gives you reports that are already in order.
Over-Reliance on Accounting Software
Accounting software is great, but if you rely solely on it and skip doing checks yourself, you may make mistakes. The CRA wants your financial records to be accurate; incorrect information can lead to tax errors.
How to Avoid
Check your financial records often to make sure they match your bank statements.
Have an accountant review things periodically to catch anything you might miss and ensure you follow CRA rules.
Forgetting to Track Miles
Many real estate agents and property managers forget to track their mileage when they drive to properties, client meetings, and other work-related tasks. The CRA lets you deduct vehicle use for work, so missing these miles means losing money on your taxes.
How to Avoid
- Use a mileage tracking app to record all your work-related driving.
- Keep a logbook with each trip’s date, reason, and distance.
Not Matching Vendor Accounts
If you don’t match up your payments to vendors and contractors, you could overpay, have disagreements, and mess up your financial reports. The CRA requires you to report your spending accurately, so missing payments or incorrect tracking can cause problems.
How to Avoid
- Be sure all payments are categorised correctly in your accounting system.
- Have your accountant perform checks a few times yearly to ensure your vendor accounts are accurate.
Putting in the Wrong Information
Even little mistakes when entering data can cause big issues when you file taxes with the CRA. You could get audited or fined if you enter income, expenses, or deductions incorrectly.
How to Avoid
- Double-check everything you enter in your accounting software before finishing your reports.
- Train your team who enter data to keep mistakes to a minimum.
Ignoring Cash Flow Timing
If you record expenses before they occur, it can disrupt your cash flow and financial statements. The CRA wants you to record the costs when you pay them, not when you expect to.
How to Avoid
- Make sure to record expenses only when they occur, not before.
- Use accrual-based accounting to track your cash flow better.
We highly recommend consulting a real estate professional. At Accounting for Realtors, we know the right process to follow when dealing with CRA regulations.
Conclusion
Keeping your real estate accounting in order is super important. Messing it up can lead to expensive mistakes, penalties from tax authorities, and missed opportunities to grow your business. Things like mixing your personal and business money or forgetting to account for depreciation can cause big problems later.
To build a strong financial base, set up transparent processes, get expert advice, and keep up with tax rules. The trick is to be consistent. Track your spending, keep your accounts separate, and check everything often. Doing this will save you cash, give you confidence, and simplify your path to success.
