Aloha Investors!

Whether you are buying property to hold and rent out, or flip as soon as possible, there are tips that you all should know and understand.  First of all, it’s all about documentation.  If you were selected for audit, the only thing that is important to the IRS is can you substantiate your income and deductions.  So I strongly encourage you to keep every receipt, no matter how small for each of your properties.  I know some of you may have several properties.  Remember, the IRS doesn’t normally audit your current year return, it will be one from 2-3 years ago. You can’t be expected to remember where your income came from, what receipt goes with what property, etc.  I would like to outline a system for you to use that will help keep you audit-proof.

Regarding your income, make copies of ALL checks that you deposit.  Mark each check with the property the income is associated with.  You will need to keep the income separate for each property so that at end of year, it can easily be transferred to your tax return.  Each property is a profit center and needs to be reported on its own Schedule E.  If you keep your records on your computer, using QuickBooks for example, you can designate each property is own class so reports at the end of the year are clear.  If you need assistance, please let us know.  Bottom line is make copies of ALL checks.  Another reason is that some checks may be reimbursed expenses, refunds, loans, etc that are not taxable income.  If you can’t prove it under audit, then the IRS considers it all income and you will be taxed accordingly.

Same goes for expenses.  Be sure and keep receipts for all expenditures.  Credit card statements are not good enough, you will need the actual receipt from the vendor to prove what you purchased and that it was a legitimate business expense.  If you purchase from ebay or craigslist, keep the listing information and packing slip when you receive the item.  If you are working with independent contractors, get a W-9 prior to paying for the service so you can provide them with a form 1099 at the end of the year.  You also want to make sure they have Liability insurance and a business license.  In keeping with the matching system you are establishing, mark each receipt with the property name.  You can abbreviate or use Property A, B or C, as long as you understand which property that it is so data entry into your computer is accurate.  The goal is to match the income that you receive with the expenses you incur for each property.  This will help you in managing the properties and provide the information you need in evaluating which property actually makes your money and which one is costing you money. 

Another requirement per property is to keep a permanent folder in a safe place that contains the original HUD statement, the loan documents, refinancing documents, insurance certificates, management contracts, receipts for major improvements, etc.   These documents provide the information needed to begin depreciating the property and also when time to sell, to determine the gain or loss.

Owning real estate can be really rewarding but can also be very challenging.  Keeping the proper records, working closely with your property manager and staying in touch with current market trends will make that experience much more profitable and less stressful.    I wish you all a healthy and prosperous 2012!

Diane M Sandlin, CPA

Office 808-261-8510

Fax 808-440-0035

dianecpa@hawaii.rr.com