2 posts tagged with "real estate"

Running a successful real estate business requires more than just closing deals and finding perfect properties for your clients. Behind every successful realtor is a solid financial management system that keeps income organized, expenses tracked, and taxes under control. If you're a real estate professional struggling to keep your books in order, you're not alone—and this guide is here to help.

The Unique Financial Challenges Realtors Face​

Real estate professionals deal with financial complexities that many other small business owners don't encounter. Understanding these challenges is the first step toward managing them effectively.

Income Fluctuations and Cash Flow​

Unlike salaried employees, realtors experience dramatic income swings throughout the year. You might close three deals in one month and then go weeks without a commission check. This irregularity makes budgeting and cash flow management particularly challenging. You need to plan for lean months while maximizing the benefits of high-earning periods.

The seasonal nature of real estate compounds this issue. Spring and summer typically bring more activity, while winter months can be significantly slower in many markets. This means you must be strategic about saving during peak seasons to cover both business expenses and personal needs during quieter times.

Commission-Based Income Tracking​

When you work on commission, every transaction involves multiple parties and potential splits. You might be splitting commissions with your brokerage, other agents, or team members. Keeping accurate records of who gets paid what—and when—is essential for both tax purposes and business planning.

Additionally, commission structures can vary from deal to deal. Some transactions might involve referral fees, others might have different split arrangements, and you need to track all of these accurately to understand your true earnings.

Business Expense Management​

Real estate professionals incur numerous tax-deductible expenses, but tracking them all requires diligence. Common deductible expenses include:

Marketing and Advertising: Professional photography, virtual tours, listing ads, social media campaigns, direct mail, and your website all add up quickly. These costs are fully deductible as legitimate business expenses.

Mileage and Transportation: You're constantly driving to showings, open houses, inspections, and client meetings. The IRS allows you to deduct business mileage at a standard rate (currently 67 cents per mile for 2025), which can result in substantial tax savings if you track your trips accurately.

Continuing Education: Real estate licenses require ongoing education. Course fees, exam costs, and related materials are all deductible business expenses.

Professional Fees and Memberships: MLS fees, realtor association dues, broker fees, and professional liability insurance all qualify as deductible expenses.

Home Office Deduction: If you maintain a dedicated space in your home exclusively for business use, you may qualify for the home office deduction, which covers a portion of your rent or mortgage, utilities, and maintenance costs.

Staging and Property Preparation: Costs associated with staging properties for sale can often be deducted as business expenses, though this depends on your specific arrangement with clients.

Tax Complexity and Compliance​

As a self-employed real estate professional, you're responsible for paying quarterly estimated taxes. Missing these payments can result in penalties and interest charges. You'll also need to manage your self-employment tax, which covers Social Security and Medicare contributions that would typically be split with an employer.

Form 1099-NEC reporting adds another layer of complexity. You'll receive 1099s from your brokerage, and if you pay contractors (like photographers or virtual assistants), you'll need to issue 1099s to them as well.

The Real Estate Settlement Procedures Act (RESPA) requires compliance with specific financial practices to prevent fraud and ensure transparency in real estate transactions. While RESPA primarily governs settlement services, realtors should understand how it affects commission payments and disclosure requirements.

Essential Financial Management Practices​

Implementing strong financial habits now will save you stress and money in the long run.

Separate Personal and Business Finances​

Open a dedicated business checking account and use it exclusively for real estate-related transactions. This separation simplifies bookkeeping, makes tax preparation easier, and provides legal protection if your business is ever audited or involved in litigation.

Consider getting a business credit card for business expenses. This creates a clear paper trail and can provide additional benefits like rewards points on your business spending.

Implement a Reliable Tracking System​

Choose a method for tracking income and expenses that you'll actually use consistently. Options range from simple spreadsheets to comprehensive accounting software. The key is consistency—track every transaction, no matter how small.

For mileage tracking, use a dedicated app that leverages GPS to automatically log your trips. Manual mileage logs are time-consuming and easy to forget, but apps make the process seamless.

Maintain Detailed Records​

Keep receipts, invoices, and documentation for every business expense. The IRS requires substantiation for deductions, and good records protect you in case of an audit. Store documents electronically with cloud backup to prevent loss.

For larger purchases or unclear expense categories, make notes about the business purpose. This context helps later when you're preparing taxes or reviewing your finances.

Set Aside Money for Taxes​

A common mistake among new real estate professionals is spending all their commission checks without setting aside money for taxes. As a general rule, reserve 25-30% of your income for tax obligations, including both income tax and self-employment tax.

Transfer this money immediately into a separate savings account designated for taxes. This way, you won't be tempted to spend it, and you'll be prepared when quarterly estimated tax payments are due.

Pay Quarterly Estimated Taxes​

The IRS requires self-employed individuals to make quarterly estimated tax payments if they expect to owe more than $1,000 in taxes for the year. These payments are due April 15, June 15, September 15, and January 15.

Calculate your estimated taxes based on your expected annual income or use the prior year's tax liability as a safe harbor. Missing these payments results in penalties, so set reminders well in advance of each deadline.

Review Your Finances Regularly​

Schedule monthly financial reviews to assess your income, expenses, and progress toward your goals. This regular attention helps you spot problems early, identify spending patterns, and make informed business decisions.

During these reviews, reconcile your bank statements, categorize any unclear transactions, and ensure all income has been properly recorded.

Maximizing Tax Deductions​

Understanding available tax benefits can significantly reduce your tax burden.

The Qualified Business Income Deduction​

Many self-employed real estate professionals qualify for the Qualified Business Income (QBI) deduction, which allows you to deduct up to 20% of your qualified business income. This deduction can result in substantial tax savings, but it comes with income limitations and complex rules.

Consult with a tax professional to determine your eligibility and ensure you're calculating the deduction correctly.

Real Estate Professional Status​

If you meet certain IRS criteria for time spent and participation in real estate activities, you may qualify as a "real estate professional" for tax purposes. This designation can provide significant tax advantages, particularly related to passive activity loss limitations.

The requirements are strict: you must spend more than 750 hours per year in real estate activities and more than half of your working time in real estate. Detailed time logs are essential to substantiate this status.

Retirement Contributions​

As a self-employed individual, you can take advantage of retirement plans designed for small business owners, such as SEP IRAs or Solo 401(k)s. These plans allow you to contribute significantly more than traditional IRAs while reducing your taxable income.

A SEP IRA, for example, allows contributions of up to 25% of your net self-employment income, with a maximum of $69,000 for 2025. These contributions are tax-deductible and grow tax-deferred.

Common Financial Mistakes to Avoid​

Learn from others' mistakes to keep your real estate business financially healthy.

Mixing Personal and Business Expenses​

Using your personal account for business expenses (or vice versa) creates bookkeeping nightmares and can raise red flags during an audit. Maintain strict separation between personal and business finances.

Neglecting to Track Small Expenses​

Those $5 parking fees and$10 meals add up over the course of a year. Small expenses are easy to overlook, but collectively they represent significant deductions. Track everything.

Waiting Until Tax Season​

Don't wait until March or April to organize your financial records. By then, you'll have forgotten important details and will scramble to locate receipts. Stay current with your bookkeeping throughout the year.

Underestimating Tax Obligations​

Many realtors underestimate how much they'll owe in taxes, particularly in their first profitable year. This can lead to unpleasant surprises and financial stress. Always err on the side of setting aside more for taxes rather than less.

Not Seeking Professional Help​

While you can manage basic bookkeeping yourself, tax laws for real estate professionals are complex and change frequently. The cost of hiring a qualified tax professional is typically offset by the additional deductions they find and the penalties they help you avoid.

Planning for Long-Term Success​

Financial management isn't just about surviving tax season—it's about building a sustainable, profitable business.

Build an Emergency Fund​

Aim to save 3-6 months of business and personal expenses in an easily accessible emergency fund. This cushion protects you during slow periods and gives you peace of mind to focus on growing your business rather than stressing about money.

Invest in Your Business Growth​

Set aside a portion of your income for business development. This might include upgrading your marketing materials, investing in better technology, taking advanced training courses, or hiring support staff. Strategic investments in your business can accelerate your growth and income potential.

Monitor Key Performance Indicators​

Track metrics that matter to your business success, such as average commission per transaction, conversion rates, client acquisition costs, and return on marketing investments. These numbers tell the story of your business health and guide strategic decisions.

Plan for Retirement​

Without an employer matching 401(k) contributions, you're solely responsible for your retirement planning. Make retirement savings a priority by automating contributions to your retirement account. Your future self will thank you.

Conclusion​

Financial management might not be the most exciting part of being a realtor, but it's absolutely essential for long-term success. By implementing strong systems, tracking your income and expenses diligently, staying compliant with tax obligations, and planning strategically, you'll build a solid financial foundation for your real estate business.

Remember that the time you invest in financial management pays dividends in reduced stress, lower tax bills, and better business decisions. Whether you handle your finances yourself or work with professionals, make financial management a priority in your real estate practice.

The most successful realtors aren't just great at finding properties—they're also skilled at managing the business side of real estate. Start implementing these practices today, and you'll be well on your way to building a thriving, financially healthy real estate business.

Real estate transactions may constitute the largest financial activity in a family's lifetime. This article explains how to model real estate in Beancount. I treat real estate as an asset and the appreciation of the house as unrealized gain. Additionally, the mortgage is modeled as a liability, and the interest is considered an expense.

Let's assume that Mr. A purchased a luxury home located at 123 ABC Street, XYZ City, CA, 12345 on January 1, 2020, for a price of 1 million. The interest rate is 3.0%, the down payment is 20%, and the loan amount is 800,000.

Create Accounts​

Firstly, we treat the house as an Asset. Since the house is being listed as an Asset, it needs to be given a unit. In this case, the unit quantity is only one, it's unlikely there will be multiple, and even if it's the nth house, we would want to record it in a separate Asset. That is to say, one house corresponds to one Asset, and this Asset has a special unit, its value can only possibly be 1.

2019-12-31 commodity HOUSE.ABC
  name: "123 ABC Street, XYZ City, CA, 12345"

2019-12-31 open Assets:Property:US:CA:123ABC                        HOUSE.ABC
2019-12-31 open Liabilities:Bank:US:SomeBank:Mortgage:Loan          USD

In the first line here, we defined a commodity unit representing the house. In the fourth line, we defined an Asset account, which holds the commodity unit previously defined as the house. In the fifth line, we defined an account for the lending bank. As it's a liability, it falls under the Liabilities category.

Purchase​

With the accounts set up as above, the act of buying a house is equivalent to

borrowing money (debt) + spending money (down payment) = 1 house in asset

The most important reference when buying a property is likely the Buyer’s Settlement Statement, which clearly outlines the flow of money.

2020-01-01 * "Buying the house"
    Assets:Property:US:CA:123ABC                  1 HOUSE.ABC {1,000,000 USD}
    Assets:Bank:US:SomeBankA                      -100,000 USD
    Assets:Bank:US:SomeBankB                      -101,000 USD
    Liabilities:Bank:US:SomeBank:Mortgage:Loan    -800,000.00 USD
    Expenses:Home:Insurance                       1,000 USD
    Expenses:Home:Mortgage:Loan:ClosingCost

Here, we're detailing the transaction of buying the house, where money flows out from some banks (used for down payment and other expenses), a loan is taken (adding to liabilities), and a house is gained (added to assets).

Pay back mortgages​

Based on the above purchase record, we currently owe 800,000 USD. Due to the interest, and considering that all loans in the US are amortized equally in terms of principal and interest, the monthly payment includes a portion for interest and a portion for principal. In the early stages, the interest constitutes the majority.

To record the loan repayment, all you need to do is check your loan bank's statement. You just need to know how much of the principal you are repaying each month, and the rest is interest. The interest is counted as an Expense.

2020-02-01 * "Mortgage payment"
    Assets:Bank:US:SomeBank:Saving:Joint              -3,372.83 USD
    Liabilities:Bank:US:SomeBank:Mortgage:Loan         1,376.26 USD
    Expenses:Home:Mortgage:Loan:Interest

This entry details the monthly mortgage payment which is subtracted from your joint savings account. The repayment of principal reduces the liability, while the interest part is treated as an expense.

Appreciation​

If you want to record the appreciation of the property, some people create a separate account[, only recording the appreciation of the current property. Considering that the value of the house may increase or decrease, this appreciation may be negative. The advantage of this is that in the summary of your total assets, these two accounts will be included, one for the value of the house at the time of the transaction, and the other for the current appreciation of the house, thus reflecting the real-time price of the house.

I did not adopt this method, mainly for the following reasons:

1. The current value of the house can only be an estimate, for reference only, without practical value. Usually, I can only get the evaluation of the property on websites like Redfin or Zillow, and I personally don't think it has high reference value. I also did not consider incorporating these appreciations into total assets in real time.
2. Personally, I think before the mortgage is paid off, if the cash flow of the house is negative, to some extent, the property is still a liability. Therefore, incorporating it into assets prematurely will give you an illusion of enriched assets and appreciation, and I personally want to avoid this illusion.

The method I use to record property appreciation, which will also be discussed later on how to model RSUs. This method is to use a virtual currency unit. Assuming your base currency is USD, we can use USD.UNVEST (it seems that there is no need to create a new Commodity for this) to indicate that this asset is calculated in a special currency. The growth or reduction of this asset will not be recorded in USD. This way, I can achieve my original goal, that is, to record the appreciation of the house, and this appreciation will not be included in the final balance sheet (Balance Sheet).

2020-01-01 price HOUSE.ABC                          1,000,000 USD
2025-01-01 price HOUSE.ABC                          1,400,000 USD.UNVEST

You only need to price your property to USD.UNVEST regularly.

So, on Fava's Commodity page, you can track the trend of the reference price of the house. But on the Balance Sheet page, the price of the house is still the price of the house at the time of the transaction. That is to say, your total assets are still your down payment money at that time, plus the principal you keep paying off. The final change of this asset should only occur when you buy a house.

Sell​

Because no property has been sold yet and the various miscellaneous fees in the middle are unclear, this is a hypothetical scenario.

Suppose, on January 1, 2025, the property has appreciated to $1,400,000, and some reference data are as follows:

Person A decides to sell the property, and the final selling price of the house is $1,300,000.

2025-01-01 * "Selling the house"
    Assets:Property:US:CA:123ABC                  -1 HOUSE.ABC {1,300,000 USD}
    Liabilities:Bank:US:SomeBank:Mortgage:Loan    709,656.20 USD
    Expenses:Home:Agent:Fee                       72,000 USD
    Expenses:Home:ClosingCost                     10,000 USD
    Expenses:Home:Tax                             90,000 USD
    Assets:Bank:US:SomeBankA

Here it is assumed that 2 out of 5 years are self-occupied, so the appreciation of 500,000 does not need to be taxed. I randomly calculated a number here. In the end, the money that enters Person A's account is $418,343.8, of which 200,000 is the down payment at that time, and about 100,000 in interest has been paid. So, in the end, the book profit for Person A is around 100,000. It is worth noting that my calculation is not fair, after all, Person A has saved rent for these 5 years, and there may be other expenses on the house, such as maintenance, decoration, and so on.

To reflect this in the balance sheet, you can add this pricing.

2025-01-01 price HOUSE.ABC                          1,300,000 USD