Keeping track of the accounting for a house flip is a daunting task. Shoving receipts in a box to review later is a bad idea. Before you start flipping or at the beginning of the flip get organized and it will make life easier.
When you’re just starting and everything is new and there is no system. Finding a system that works for you is the goal. Making mistakes with finances can be a nightmare. I can not emphasize this enough, GET ORGANIZED in the beginning!!
Creating an Accounting System
This is just basically how all spending will be tracked, recorded, and organized.
- Create a spreadsheet. If you are good at creating spreadsheets this can be an easy way to keep track of your finances. Downside you will probably have to put in most information manually which is time-consuming. This is how we started but quickly moved to QuickBooks for the convenience of not having to manually enter expenses.
- QuickBooks. I have quick books self-employed. It is the software we have used in the past. Our accountant can connect to our account. Keeping track of receipts is as simple as taking a picture and adding it. Reports can be printed out quarterly or yearly. Add the app to your phone and track mileage. Quickbooks will cost you every month and can work great. But I believe Stessa is easier to keep tax information separately for each property and it’s free.
- Stessa it’s FREE. Ultimately the software we ended up going with is Stessa. It is made for rental properties. Connects to our bank account and credit cards easily. Receipts can be connected to an expense. Take a picture of a receipt and add an expense manually and Stessa will pull as much information from the receipt and auto-fill in as much as possible. It is simple to keep the properties separate. Stessa makes it easy to check the numbers on an individual property or your entire portfolio. Best of all it’s free. If you are looking for free accounting software try Stessa. I am not an affiliate and don’t get paid if you sign up I just think for the majority of people Stessa will solve most of your problems.
Don’t Mix Finances
To start any business open a bank account dedicated to only that business. If you don’t have an EIN and can’t open a business account simply open one in your name. Do NOT use your personal bank account as your business account. Trying to separate spending for the flip from your personal finances isn’t worth the time. Create a separate bank account. With a separate account for business, you can open more for each project or simply open a credit card for new projects.
We like using credit cards for the rewards, they are easy to open and use and simple to keep track of. We can attach the statement to the payment and have a record of what we bought. If there is a big purchase that we want to receipt to be in Stessa we simply add that receipt with the statement. Stessa can also split an expense and it could be separated and the receipt added if that is preferred.
We look for credit cards that have rewards. Citi bank has good rewards. The main card we always have for a project is our Amazon card. There is a bit we buy off Amazon and getting 5% back is nice. The most tempting part is using it for nonbusiness purchases to get the 5%.
Talk to your CPA
Before setting up your business. Because the type of entity you set up can impact your taxes. Your CPA should be able to recommend what entity will work well for your business. After you decide, find a reasonably priced lawyer to set up the business. It doesn’t cost that much and is well worth the money.
Keeping it in your own name is fine too. But an umbrella insurance policy for protection is a good idea.
Categorizing Expenses
When keeping track of expenses make sure to include these categories:
- Purchase Expenses
- This includes earnest money, inspections, appraisals, financing fees, and closing costs. I would suggest keeping these in a separate category from the actual price of the house. You may end up paying some of these expenses but not getting a property. If you purchase a house the earnest money will become part of the purchase price but keep it in this category until the sale is complete.
- Property Price
- Simply what you paid for the house itself.
- Fixing the Flip
- All the materials needed to fix the property. Anything paid to general contractors or subcontractors. Anyone you have hired and everything you buy for a flip.
- If there is a possibility of renting, separate improvements vs repair costs.
- Holding Costs
- The longer you hold onto a house the more holding costs there are. This includes utilities, taxes, insurance premiums, mortgages, or hard money loan payments.
- Selling Costs
- This includes things like commissions to realtors, closing costs, or paying off a mortgage or loan.
Not only does this help accounting purposes but gets you familiar with the numbers to help to estimate rehab costs in the future.
Records and Receipts
I keep all paperwork concerning buying and selling the property. Tax documents and insurance documents and policy and store after a flip is complete.
As it relates to the rehab costs I keep
- We keep all the paper receipts or a copy in Stessa, especially for larger transactions
- Checks we attach a copy in stessa
- Petty cash for small transactions. Truthfully… I just use my credit card and don’t bother with actual cash. It is handy to have but a credit card connected to accounting software is much easier to track.
I keep anything that can be used as a supporting document. Still, unsure if your papers are good enough or not? Take a look at the IRS website about what records to keep.
Deductions for Mileage
This gets a little tricky. I would defiantly recommend discussing this with a good CPA. From what I understand if your flip is near you and you’re traveling to the property you can count that as mileage to deduct but only if you have a home office. No home office? Well, then it may count as a commuter rule. The flip property counts as commuting to work and no mileage deduction. Super easy fix, just make sure to have a home office which is also a deduction.
Track mileage to and from trips related to the flip. Quickbooks has an app that will record your drive and miles. I used this for a while but it would occasionally log out and not record mileage.
I use google. It tracks everything I do anyway and I can go back and just record all my miles.
All of this feels a little excessive but if the IRS decides to audit you this is an easy area they can get you. Overestimating miles or not documenting it right is a common mistake and one that may cost you later. I have luckily never been audited but have an acquaintance who was, and he ended up paying thousands for incorrectly deducting miles for years.
How Long to Keep Records
From what I can tell 7 years is a good amount of time to keep records. You can look at the IRS recommendations here. Three years may be enough for most but I keep things around for 7 just in case it is needed. Having them electronically scanned online makes it easier to keep track of everything but I keep the hard copies too.
One exception is if you don’t file a tax return. I believe they can come back to audit you anytime then. But not filing taxes… don’t make that mistake.
Key Points
- Find a good accounting system. Preferably software and apps to make it as streamlined as possible.
- Keep business finances separate from personal finances.
- Categorize all expenses.
- Keep all supporting documents in case the IRS comes to visit.
- Don’t forget about mileage.
- Keep your records for at least 6 years.
What is your favorite accounting system for real estate? Any mistakes or tips to share? Leave a comment and let us know we love hearing about others’ experiences.
Disclaimer: I am not a CPA. This is not meant to be legal advice. This is how I do my accounting and a few things I have learned over the years. My goal is to help give those just starting some possible strategies and a few ideas on what to expect. Any legal questions about taxes should be directed to a qualified professional.