Why Accounting For Real Estate Agents is So Important

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Why Accounting For Real Estate Agents is So Important

You studied hard to pass the Sales Persons’ or Brokers’ course. You got your license and now you’re in business. Except, you don’t know anything about accounting for real estate agents!


Don’t panic. Here’s a quick guide that will get you started in the right direction.


SHOULD YOU HIRE AN ACCOUNTANT?

The simple answer is yes, as soon as possible. An accountant can help you get organized about things that happen over time. So the sooner you get squared away, the greater the rewards will be in the long run.


There are many terrific reasons for hiring an accountant. Starting from the beginning, an accountant can help you develop a business plan.


You may think that real estate is a kind of “typical business” where you already know the business plan. You might think that your broker is going to just tell you what to do. There is some truth to both of these statements, but you had better not bank on it!


As a real estate professional, there are all kinds of different business plans. You could focus on a particular area or a particular kind of media. Are you in residential real estate, commercial or timeshares?


In any case, there will be different requirements and different tax implications for different business plans. Your accountant can help you design the best technical business plan for your approach. This should be one of your first steps before you actually start making transactions out in the wild. Utilizing technical accounting support early on can ensure your financial foundation is strong and aligned with regulatory standards.


KEY COMPONENTS OF A REAL ESTATE BUSINESS PLAN

Even if you are a first-year sales agent, you should create a business plan. Your accountant* will help you do it. Create the business plan according to typical standards for a small business.


In other words, call a section the “Executive Summary.” Not “Strategic Plan” or anything else. The specific phrase Executive Summary will be expected whenever a professional looks at your business plan.


There are many resources on the internet to help you create a business plan. It’s pretty standardized, and you don’t need to look at resources specific to real estate. You are a “small business,” and information in that general category applies to you.


Here are the typical parts of a real estate business plan.


Executive Summary

The executive summary is a short summary of the rest of the business plan. Describe who you are and what kind of business you are in, what kind of real estate you are doing (commercial, residential, etc.), your mission or vision statement, the reason you are making a business plan, and the company name and location plus your specific relationship to the company (are you an agent, an owner, or an affiliate?).


Company Description

If you do not own the company–for instance, if you are a sales agent–make that very clear in this section.


Products and Services

What kind of real estate business are you in? How do you collect money from the client? Do you offer escrow?


Market Analysis

Explain the market you plan on selling in. Do you plan on selling in a specific geographic area? What is the demographic breakdown of the area you plan to sell?


What are the schools like in those areas? What have been the recent price differentials in that area, and compare all that data to national and historical trends. Be sure to do your homework.


Strategy and Implementation

How are you going to execute your plan? What kinds of commissions do you plan on charging the client? How are those commissions broken down?


What are your expenses going to be? How do you plan on paying for those expenses?


Organization and Management Team

Who is on your team? Don’t include people in this section without their explicit permission.


Financial Plan and Projections

How much money do you need to operate for the next year? Where do you plan on getting that money?


What if sales are worse than expected, and costs are higher than expected? What sales volume do you need to make, to not go broke?


YOUR LAWYER AND YOUR ACCOUNTANT ARE A TEAM

There are many situations when lawyers and accountants are actually part of a team. This is a service large firms and small partnerships offer. But you can make your own team as most lawyers have no problem working with most accountants.


This is another reason to handle your real estate broker accounting early on in your business’s development. Get a lawyer and get an accountant, give them each other’s phone number. They can coordinate with each other and often good things can happen, even for a small business.


Both of these professionals can offer advice on what kind of legal your business should become. If you’re a sales agent, you’re generally considered a 1099 contractor. If you’re setting up a brokerage, it can be an LLC or even a legal corporation.


The bottom line is that you want the right hand talking to the left hand. Get your lawyer and your accountant together on the phone at least, so that they both know what the other is doing.


SOFTWARE

A huge part of bookkeeping for real estate is the software that you use. This can either make your life a breeze or a nightmare so choose wisely. Once again, this is something a real-life accountant can advise you on. Think this through up front and you will compound the benefits gained from using good software.


Good software integrates directly with your financial institution and your accounting system. There are many systems on the market that all basically do the same thing. One good solution is to find an accountant first and go with the software package they are familiar with.


Be aware that many commercial platforms for small business have “extensions” or “plugins” that are specifically for real estate professionals. Check with your provider to see if something like that is available on your platform.


Realtyzam

Realtyzam is a cloud-based real estate accounting software platform specifically designed for the real estate business. It comes setup already with templates for listing fees, brokers fees, commissions and other popular real estate transactions.


Realtyzam is available for Android and iOS and both desktop and mobile-based devices. There is no flat fee as it’s a monthly subscription fee pay model.


Xero

Xero is a cloud-based account platform that allows you to manage and integrate your accounts remotely from anywhere. This is one of the best programs for real estate professionals because it links directly with your accountant’s software. If you have an expense, you just enter it once, and it’s done.


This is a big time saver. You don’t need to consolidate anything at the end of the year, it’s already entered and shipped right over to your accountant. They take the data and collect it for your tax returns.


Another great feature of Xero is that you can use Quickbooks with it. You don’t have to, the Xero platform has everything you need, but if you’re already on Quickbooks, no problem. There is a handy import tool that can handle any kind of standard input.


Xero is a monthly service as well. Ask if your accountant can offer a free subscription to Xero.


Quickbooks Self Employed

If you are a sales agent, you may not need all the complex tools available in products like Xero. Quickbooks Self Employed is a great bookkeeping package that helps you keep personal and business expenses separate, and generate reports and tax forms at the end of the year.


This is a simpler type of package, and you can do this if you have an accountant or not.


BOOKKEEPING

Real estate agent bookkeeping is a relatively straightforward process. You’re not reinventing the wheel, you’re employing a tried and tested business model. That’s why it’s important to get advice from an experienced professional.


It’s really a factor of how big an organization you are developing is, which will determine if you need a full-time bookkeeper or not.


The general rule for real estate is a company of ten people or more needs a full-time bookkeeper. Less than that, and you can get away with only using digital products.


You have to keep track of your expenses and costs. The easiest way to do this is to develop a system to record everything, and then just commit to using it. You could collect physical receipts or you can collect them using some kind of software, it’s up to you.


Your software suite will integrate with your accounting software and create a pretty good bookkeeping platform, especially for a very small business.


ACCOUNTING FOR REAL ESTATE AGENTS

Get yourself straightened out in the beginning, and you’ll do great in your real estate business. Accounting for real estate agents isn’t much different than accounting for any small business, but it’s different enough that you need experienced representation to make progress. Many accounting firms that support real estate professionals also specialize in nonprofit financial reporting, which requires a similar level of technical precision and compliance awareness, so choosing the right partner ensures you’re covered on all fronts.


By streamlining your new accounting process, you can get back to doing what you do best: selling real estate! Check out our blog for more information on small business accounting.

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September 15 Estimated Tax Deadline: Strategies for Pass-Through Entities

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Because income from partnerships and S corporations generally passes through to their owners, owners may need to make individual estimated tax payments based in part on their share of the entity’s taxable income When internal teams don't have a dedicated workflow for this, they often get bogged down trying to predict exact year-end profits during a busy quarter. Without a clear mechanism to manage this, I frequently see companies do one of two things: they either underpay and leave themselves vulnerable to IRS penalties, or they overpay to "be safe." Overpaying might feel like the responsible choice in the moment, but it unnecessarily ties up working capital. When these distributions are sized off gross revenue rather than a projection that accounts for deductions or state-level elections, the company pulls more cash out of the operating account than the owners actually owe. 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Aligning Outlays with Actual Cash Flow If a company sees a massive spike in revenue during Q3, the standard installment method might demand a payment that creates a sudden cash flow imbalance. Good intentions won't balance the cash flow at this stage; you need a precise mathematical approach. To stabilize cash flow during a sudden revenue surge, one strategy to consider is the Annualized Income Installment Method . Instead of assuming income is earned evenly throughout the year, the Annualized Income Installment Method determines the owner's required installments based more closely on income earned during the applicable annualization periods State-level PTE tax elections may also provide federal tax benefits by allowing qualifying state income taxes to be paid and deducted at the entity level rather than being subject to the individual SALT deduction limitation. The result? 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Blogs

Decoding the Digital Ledger: Navigating FASB’s New Standards for Crypto Assets and Intangibles (ASU 2023-08)

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Blogs

The Rise of Digital Assets in Business

The Rise of Digital Assets in Business

Companies are beginning to set foot into unconventional investments, such as Bitcoin, and Ethereum, which are cryptocurrencies, a form of digital assets. With their tremendous potential for growth and unique portability and transparency, digital assets are an alluring venture. This can transform how financial markets operate, and investors interact with the traditional financial system. Also, as more companies embrace up-to-date and open technology, digital assets could become a more common medium of exchange and a streamlined, transparent, and cost-efficient form of value transfer. Like all other investments, digital assets should conform to the broader investment strategy developed by companies. 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However, the more we comprehend how digital assets work, the easier it will be to adhere to laws and regulations. What is a Digital Asset? There is currently no precise definition for this type of asset; however, we can refer to the executive order issued by US President Joe Biden last March 9, 2022, titled, “Ensuring Responsible Development of Digital Assets” . As outlined in the order, the term “Digital Assets” is the umbrella term that refers to all cryptography-based assets and other representations of value, regardless of the technology used, that are issued or represented in digital form through the use of distributed ledger or “blockchain” technology. 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Assessed for valuation and impairment? Derecognized?   To date, the US Generally Accepted Accounting Principles (“GAAP”), as represented by FASB Codification, has yet to provide specific guidance on accounting for digital assets. With this, publicly available information such as the American Institute of Certified Public Accountants Practice Aid titled, “Accounting for and Auditing of Digital Assets” , is used as a guide and reference in the meantime. The practice aid conclusion stated that the characteristics of digital assets meet the definition of indefinite-lived intangible assets and would generally be accounted for under Accounting Standards Codification or ASC 350, Intangibles—Goodwill and Other.    In addition, when applying the existing US GAAP guidance by analogy, native digital assets generally do not meet the definitions of cash, inventory, or financial assets and are accounted for as an intangible assets. It emphasized that “digital” would not meet the definition of other asset classes within GAAP, as described in the following examples: • Digital Assets will not meet the definition of cash and cash equivalents as they are not considered legal tender and are not backed by sovereign governments.  • Digital Assets will not be financial assets as they do not represent a contractual right to receive cash or another financial instrument • Digital Assets, though may be held for sale in the ordinary course of business, they are not tangible assets and therefore may not meet the definition of inventory. However, the problem with digital assets that are accounted for as indefinite-lived intangible assets is that, it only captures negative volatility through impairment recognition. Note that under ASC 350, if an indefinite-lived intangible asset is impaired, an impairment loss is recognized, but any subsequent increase or recovery in value cannot be recognized until the asset is sold. As a result, this could be misleading to the users of financial statements and does not truly represent the economic nature of digital assets as these generally have actively traded markets.  While there is no official accounting model yet that considers the proper way to reflect the substance, liquidity, and value of the digital assets that are aligned with the economic reality, other models may be more appropriate, depending on the circumstances. This can vary widely, and, therefore, the accounting framework to be applied under US GAAP needs to be considered on a case-by-case basis. The type of digital asset will also be a critical factor in terms of accounting and financial reporting under existing accounting rules.  As the adoption of digital assets continues to soar, these issues will only become more prevalent and pervasive. Standard setters will continue to look into alternative and more refined approaches to accounting for digital assets to resolve practical problems and provide transparent financial reporting for users of financial statements.  Recent Developments With digital assets’ potential to transform the traditional financial system, the associated challenges are drawing considerable regulatory attention. To date, below are the relevant developments for the regulation of digital assets: • On March 9, 2020, US President Joe Biden signed an executive order on “Ensuring Responsible Development of Digital Assets,” which includes cryptocurrency and other assets such as NFTs. The executive order shows the commitment of the White House to participate in the research on cryptocurrencies and engage departments across the government to collaborate in creating a framework that will regulate digital assets. It also outlines a “whole-of-government approach to addressing the risks and harnessing the potential benefits of digital assets and their underlying technology.” Further, it serves as official recognition of the increasing impact of digital assets and the US federal government’s intention to regulate digital assets as a whole and cryptocurrencies, specifically. • On March 31, 2020, the US SEC issued a Staff Accounting Bulletin (SAB) on accounting for the obligations to safeguard crypto assets that an entity such as a crypto exchange holds for users. It clarifies how the agency expects companies to apply existing accounting standards to digital assets.  • On May 11, 2022, the FASB added a project to its technical plan to improve the accounting for and disclosure of certain digital assets. Previously, the FASB has received three agenda requests on digital assets since October 2020, all of which encourage the Board to address the financial reporting for digital assets. • And more recently, the US Treasury Department issued a “Greenbook” that includes budget proposals to modernize various tax rules, including those for digital assets. Rules will change for treating securities loans as tax-free to have other asset classes and address income inclusion, provide for information reporting by certain financial institutions and digital asset brokers for purposes of exchange of information, and require reporting by certain taxpayers of foreign digital asset accounts. In addition, the plan would amend the mark-to-market rules for dealers and traders to include digital assets. What’s Ahead? As the digital asset landscape continues to evolve across various types of market participants, products, and technologies, companies and other stakeholders of all kinds must be able to properly reflect and disclose these digital assets in their financials and assess the overall impact of the risks involved in owning these types of assets when making decisions. However, since digital assets are new and unique from other investments, the existing accounting models does not yet fully reflect these assets’ true nature and value in accounting and financial reporting. Also,  companies must be aware that regulators are rapidly evolving their guidance on reporting, so the rules of engagement today may be different in the future. Accordingly, accounting, assurance, and tax services for companies with digital assets have become more sophisticated and require professional advisors to understand the nature of those complexities. This is similar to the specialized approach required for nonprofit financial reporting, where unique compliance requirements demand expert knowledge and precision. We’d love to help. To ensure that all factors are considered in the pursuit of reliable financial reporting, effective and efficient operations, and compliance with law and regulations, our services can be scaled to accommodate your business needs. Our Technical accounting Group provides a thorough analysis on assessing the impact of complex and unusual accounting transactions.   E-mail us at [email protected] for a full consultancy assessment. Disclaimer: The information contained herein is general and is not intended to address the circumstances of any particular individual or entity. It is not intended to be relied upon as accounting, tax, or other professional services. Please refer to your advisors for specific advice. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. *Disclaimer: Services being offered do not require a state license. About the Author Reinald John Maliberan is a supervisor of the Technical Accounting Group of Scrubbed. He assists companies in preparing technical memoranda and performs an extensive review of US GAAP financial statements (i.e., 10-Q and 10-K reports), note disclosures, and account reconciliations. Before joining Scrubbed, he has almost five years of professional experience with Ernst and Young (EY) Philippines handling financial statement audits for public and private companies.

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