Keeping track of receipts, rent payments, and finances is key to running a successful business.
Whether it’s for residential, commercial, or mixed-use properties, you'll need to track rent, manage expenses, and keep everything organized for tax time.
In this guide, we’ll cover important terms you need to know, tips for setting up your accounting, best practices to follow, and even a look at the best software to use.
Whether you're new to this or just looking to improve your current setup, we’ve got you covered!
What Is Property Management Accounting?
Property management accounting refers to the specialized practice of accounting focused on managing rental properties, whether residential, commercial, or mixed-use. It involves various financial tasks and processes to oversee the financial operations of properties.
Unlike typical business accounting, property management accounting requires separate accounts for properties and tenants. Additionally, administrative tasks like payroll and utilities must be kept distinct from property management activities. Key aspects include:
- Rent Collection and Tracking: Managing and recording rental income from tenants, ensuring timely payments, and addressing any issues related to late or missed payments.
- Expense Management: Tracking and managing expenses related to the upkeep and operation of the property, such as maintenance, repairs, utilities, insurance, and property taxes.
- Financial Reporting: Generating detailed financial reports that provide insights into the property's financial performance. This includes income statements, balance sheets, cash flow statements, and budgets.
- Budgeting and Forecasting: Creating and managing budgets for the property, forecasting future income and expenses, and making financial plans to ensure profitability and financial stability.
- Tax Compliance: Ensuring that all financial activities comply with local, state, and federal tax regulations, including the preparation and filing of tax returns.
- Accounts Payable and Receivable: Managing accounts payable (bills and invoices to be paid) and accounts receivable (money owed to the property management business).
- Lease and Contract Management: Tracking lease agreements, renewals, and expirations, as well as ensuring compliance with contractual obligations.
- Tenant Security Deposits: Managing tenant security deposits, including tracking deposits, ensuring proper accounting, and handling returns at the end of the lease term.
This comprehensive, multi-part guide will break down property management accounting in an easy-to-understand and straightforward manner.
Here's what to expect in each part:
- Part I: Accounting terms: In this part, we'll define the most common and essential accounting terms relevant to property management.
- Part II: How to set up your property management accounting: Once you're done with Part II, you should be able to set up your accounting within whatever property management accounting software you've chosen to use.
- Part III: Property management accounting best practices: In this part, we'll cover those best practices as well as other advice to help streamline your accounting.
- Part IV: 1031 exchanges: In Part IV, we'll break down the rules for executing a 1031 exchange, how the 1031 timeline works, and more critical 1031 information.
- Part V: Choosing the best property management accounting software: Finally, we finish with a comprehensive review of the best property management accounting software.
Part I: Accounting Terms
Accounting is a profession.
It's something people major in at college, and it's a significant service that 100% of U.S. citizens need (provided you have an income).
What does that mean?
It's a big, comprehensive topic with a unique lexicon of terms that are likely foreign to you unless you have previous business or accounting experience.
That can make learning even the most basic business accounting tasks difficult and time-consuming.
That's where the first part of this guide comes in.
Below, we review the critical accounting terms you should learn to do your property management accounting. Only those terms which are relevant to accounting in property management; no fluff or useless terms you won't need to know.
Here are the top 20 most crucial property management accounting principles to know:
Accounting Period
An accounting period is a period of time within a financial statement. Typically this is either one or several days, months, or years.
If you've ever run a report in QuickBooks or a similar accounting software to see your revenue, expenses, or other factors, you'll recognize that every report uses an accounting period.
Accounts Payable
Accounts payable refers to what your business currently owes from vendors.
This is always either a product or a service that you use to run your business in some form, such as the bill for a contractor to fix a property.
Accounts Receivable
The flip side of your accounts payable. This is what you're currently owed for your services. Any open invoices, unpaid fees, or rent balances go here.
Cash Accounting Method
The cash accounting method records transactions when they're either paid or payment is received (depending on whether you're paying a bill or receiving a payment from a tenant).
Sole proprietors often use this method, as it's an easy way to manage your accounting in the early stages. However, all businesses with employees are required to use the accrual accounting method (see the next point below).
Accrual Accounting Method
This is a method of accounting that records transactions based on the transaction date, as opposed to recording the transaction when you send or receive payment. Any business with employees is required to use this accounting method.
General Ledger
Your general ledger, or G/L for short, is a complete record of all your business transactions. Chances are, if you use a basic accounting software already, this is generated automatically as you input transactions.
Bank Reconciliation
You need to regularly (often monthly) make sure that your general ledger (see above) and the actual statement balance across your business bank accounts match up. Making sure that's the case is the process of bank reconciliation.
Suppose your bank account is lower than your general ledger. In that case, you need to identify what transactions weren't recorded in your general ledger and add them in to ensure you're keeping accurate records.
Asset
An asset is anything the business owns that has value. The most obvious example is the properties themselves, but this can also include any cash deposits, land, and your accounts receivable.
Revenue
Revenue refers to the income generated by your business for a certain period. When you receive a payment from a tenant if you're a landlord (or from a landlord if you're a property management company), that's revenue.
Expense
An expense is a cost you pay to do business. Your costs will include payroll, rent, vendor and contractor payments, marketing, and anything else you pay for.
Overhead
Overhead includes all costs to run your business outside of the actual service you provide. For example, payroll, office rent, utilities, and insurance.
Credit
Credit gets into the heavy accounting jargon, but the vital thing to understand is that credit refers to any transaction that appears on the right side of an asset account. These types of transactions decrease that asset account.
Debit
Debit refers to the opposite of credit, being any transaction that appears on the left side of an asset account. These transactions increase an asset account.
Depreciation
Depreciation is used to gauge the value of an asset over time.
For example, if you purchase construction equipment to build a property, the value of that equipment will depreciate annually based on various factors.
Depreciation can often be written off on your annual taxes depending on the item, so the actual depreciation number of your assets is a number you'll want to track.
Equity
Equity is the value of, or ownership interest in, the business. If you own your business, equity equals your assets minus your liabilities.
Gross Profit
Gross profit equals revenue minus your cost of goods sold, which simply refers to the cost of offering your services.
Net Profit
Net profit is different from gross profit in that it doesn't just subtract the cost of your services; it subtracts all costs associated with running your business. That includes a term we covered earlier: overhead (or operating expenses), such as utilities and office rent.
Liability
A liability is something a company owes. Examples include accounts payable, a mortgage, payroll, and a loan.
Bookkeeping
Bookkeeping is essentially just business accounting, the process of recording business transactions that give you your accounting data.
Financial Statement
A financial statement isn't any one thing. Instead, it refers to any report that gives information on the financial health of a business.
For example:
- Balance sheets
- Profits and losses
- Income statements
If a lender or auditor needs financial statements from you, they'll typically specify which report they need.
Part II: How to Set Up Your Property Management Accounting
Now that you've learned the essential property accounting terms, it's time to put them into practice and get to work setting up your accounting.
In Part II, you'll learn all the basics of rental property accounting procedures and then some with the end goal of having the foundational elements set up to get started (or improve a thing or two if you're already established).
In Part II, you'll learn about the following:
- How to set up your business account
- How to choose your accounting method
- How to set up up your chart of accounts (with a property management example)
- Financial reports you should know about
Let's start with the first step. It might sound obvious to some, but it's a mistake many property owners make when starting, and it stems from a lack of understanding of how accounting works.
1. Set Up a Separate Business Account
A typical early accounting mistake is to do your property and other business transactions from a personal account.
In the eyes of the IRS, this a big no-no. However, that's not the only reason you want to keep your personal and business accounts separate.
Most importantly, it wreaks havoc on your accounting and makes it impossible to track your business transactions accurately.
To remedy this, set up a separate account used strictly for business. Ideally, a business checking account is designed for business purposes.
When you do this:
- All property-related income will flow into this account
- All expenses will be paid from this account (or multiple accounts, in the case of more complex rental property accounting)
2. Choose Your Accounting Method
There are two types of accounting methods:
- Accrual
- Cash
Fortunately, this step is less about choosing an accounting method than understanding the difference (more on that in a bit).
Here's a breakdown:
Cash Basis Accounting
With cash basis accounting, as soon as you receive or send money, whether for your services or the sale of a property or payment to a contractor, you record the transaction.
For example, if in September a tenant pays you $1,500 rent for that month, you or your accountant would then enter that amount as a rent payment in your accounting program right then and there.
This is the most straightforward method, because it's intuitive. When a transaction happens, you record it. It couldn't be simpler.
Because of this, it tends to be the accounting method that most sole proprietors choose to use. That changes, however, once you have employees on payroll.
Accrual Accounting
With the accrual accounting method, transactions are recorded when they occur.
What exactly does that mean?
If a tenant pays rent for the month, you record that transaction in that month.
However, if a tenant pays for several months upfront, you'd still only enter this month's rent as a transaction, even if you have those funds in your bank account.
Then, next month you'd enter the next rent payment as it occurs in that month.
If you have employees, you're required to use this accounting method; hence, it's less about choosing which way (unless you're a sole proprietor, in which case you can choose) and more about understanding each method.
3. How to Set Up Your Chart of Accounts
With your business accounts and accounting method in place, it's time to set your foundation.
Your chart of accounts is the backbone of your accounting system. It's like your internal bank account, organized based on the type of financial activity.
A chart of accounts is simply a list of all the financial accounts that your business uses.
That includes each of the major types of accounts:
- Revenue
- Expenses
- Assets
- Equity
- Liabilities
Everything in your property management accounting revolves around your chart of accounts. Every transaction is recorded in one of those five areas (with subcategories under each of them, as the above image illustrates), including everything from rent payments to maintenance costs.
With your chart of accounts, you're able to create reports like your balance sheet, which helps assess your business's health and future performance.
Visually, a chart of accounts is just a list of your various financial accounts, typically using a number system to organize those accounts.
You may or may not see the number system in your accounting system.
QuickBooks Desktop
To the left under "NAME" is each subaccount, while under "TYPE" is the master account that the subaccount belongs to.
However, to ensure these subaccounts are all organized in the corresponding master account, a number system is necessary.
This is usually done with a method referred to as "block numbering."
It's pretty straightforward: you assign a master account to a large number and block out a section of numbers then reserved for that master account's lesser subaccounts.
For example:
- 1000 - Assets
- 1100 - Residential property
- 1200 - Commercial property
Then, under each subaccount, you'd have further subaccounts:
- 1100 - Residential
- 1101 - 326 Labarca Ave.
- 1102 - 7965 Meron St.
- 1103 - 900 Bannon St.
- 1200 - Commercial
- 1201 - The Stellaris
- 1202 - Palm Drive Business Park
Notice how we have 100 account numbers blocked out for each property type. Depending on how many properties you manage, this could be much larger and have further subaccounts that organize your individual property accounts by state or city.
This is a complex topic that deserves attention. To learn more about setting up your chart of accounts, read our guide: Property Management Chart of Accounts (Free Sample Template).
4. Financial Reports You Should Know and Use
The last step to setting up your property accounting is all about growing accustomed to the reports that your accounting system can generate.
These reports are arguably one of the three most important things your accounting system does for you (the others being tracking your finances and preparing your taxes).
That's because you can use your financial reports for all kinds of things, such as the following and more:
- Obtaining funding, whether via a loan or investors
- Identifying accounting errors that are leading to overspending or wasted funds
- Uncovering areas for improvement in how you're managing or spending your money
- Doing your taxes
Here are a few examples of important accounting statements you'll want to make yourself familiar with:
- Balance sheet
- Profit and loss statement
- Cash flow statement
- Income statement
Part III: Best Practices
Now that we've gone over the basics, it's time to cover some tips, or best practices, that didn't fit in the last section.
These are best practices that are important to keep in mind when setting up your property management accounting system, or even just when interacting with it if an accountant sets it up for you.
For example, when you run reports or review parts of your accounting with your accountant, you'll have a better idea of what they're talking about and be able to offer more accurate and valuable input.
Let's get started.
1. Have Separate Accounts for Administrative and Property Management Operations
One of the unique needs of property management companies is that they have two levels of their business:
- Service: Managing properties
- Administrative: Managing the business itself
These are two very different sets of tasks and should be kept separate to maintain accurate accounting.
If you don't keep these separate, it will be challenging to do anything with your accounting; your reports will be muddled, whether you're looking for information on the properties you manage or your business overhead.
2. Include Gaps in Your Chart of the Accounts Numbering System
It's impossible to know just how many accounts you'll need over the next decade (and beyond) for your chart of accounts.
If you set up your number system without enough space between each category, you'll end up with a very confusing and inconvenient system.
What's the solution? Set up your number system by the thousands and hundreds.
For example, your master category takes a thousand (4xxx), while each subcategory takes a hundred (41xx, 42xx, 43xx)
3. Only Add Accounts When Necessary
One of the most common mistakes of business owners who manage their accounting, or employees who handle accounting who aren't trained accountants, is adding general ledger accounts too liberally.
From time to time, you may need to add more accounts. It's standard to see your chart of accounts grow over the years.
However, what you don't want is for your number of accounts to end up with a massive amount of bloat and dozens of unnecessary accounts (or ones that can be combined into fewer accounts).
This will help keep your accounting as simplified and streamlined as possible.
4. Send Your Annual Taxes to a Professional Accountant
Depending on the size of your business, you might be managing properties by yourself or with a large team.
When you're smaller, it's natural to think that it's easier to handle everything yourself instead of hiring an accountant. After all, it's a little extra savings.
However, when it comes to business accounting, especially property accounting with its quirks, you want your taxes handled by a professional.
One mistake can cause a painful audit that could have been easily avoided by paying a small fee to a local accountant who will review and sign off on your books.
5. Analyze Your Financials Annually (Minimum)
As a business owner, it's essential to review your financials each year to see what changed and what improvements you can make.
Add on top of that the fluctuating value of properties, and this becomes even more important.
At the end of each year, similarly to how you might review your goals for the business, you should inspect every level of your financials.
Cull or combine unnecessary accounts, double-check accuracy, see where you might be overspending, and use that data to inform your moves for the following year.
The best way to do that is by preparing a cash flow statement.
With a cash flow statement, you grade each property based on four metrics to determine how profitable the property will be in the future:
- Rental cash flow: Cash flow from rent payments, typically the primary source of cash flow
- Capital appreciation: The increase in the value of a property
- Debt paydown: How effectively the property is being paid down
- Tax shelter: All utilized tax deductions
If you've never done this kind of cash flow statement before, it might be worth hiring a professional to perform it for you to make sure it's done right.
6. Use Accounting Software to Save Time and Effort
You could still manage your accounting with something as simple as an Excel spreadsheet.
However, nowadays, there's a much more efficient way to manage your accounting than with a spreadsheet: software.
With accounting software, preferably dedicated property management software, you can automate many processes that would take hours to do each month manually.
You can also view a diverse range of reports at your fingertips and within seconds.
Plus, with property management-specific accounting software, you get access to features that typical accounting software can't give you.
Those features depend on the software, but they often include invaluable tools like a built-in tenant portal, automated rent payments, and a work order management system.
7. Track Deductible Expenses
A big part of accounting is tracking your expenses for the sake of accurate tax reporting.
One of the most critical parts of that is tracking your deductible expenses, which can significantly reduce your tax bill at the end of the year.
There are dozens of potential deductions when it comes to rental property management.
Here's a list:
- Legal fees
- Management fees
- Real estate taxes
- Lease cancelation fees
- Repair costs
- Supply and equipment costs (even if you just rent said equipment)
- Marketing
- Travel, specifically mileage between properties for any type of work-related tasks
- Mortgage interest payments
- Insurance
- Payment for your annual tax preparation (from the previous year)
- Payments to contractors for maintenance
- Wage payments to maintenance workers or on-site property managers you employ
For a complete list of potential deductions, see IRS Publication 535, Business Expenses, page 3:
8. Set Up a System to Track NNN Leases (If It Applies)
This point only applies if you deal in commercial real estate, where many leases are triple net or NNN lease types.
If you use NNN leases, you'll need to set up a way within your accounting system to track everyday area expenses and annually bill for tenants.
Fortunately, most accounting software can set reminders and multiple accounts, which mostly automates this process.
However, it's easy to forget and lose track of, which can wreak havoc on your accounting. So, make sure to be proactive about setting up a system for managing it.
Part IV: 1031 Exchanges
IRS 1031 exchanges (named after IRS Code Section 1031) are an invaluable part of the overall picture of property management accounting, especially when it comes to taxation.
Using a 1031 exchange to exchange investment properties allows you to defer capital gains tax. However, it's what that tax deferral will enable you to do that leads to the real benefits of a 1031 exchange:
- Shifting properties to put a stake in a developing area and maximize your returns: If you have a stagnant property, you can change the value in it to another in a promising market.
- Avoiding the downside of market volatility: You can also exchange properties when you expect the market to change in a big way, shifting from higher-risk properties to lower-risk ones.
Despite this, 1031 exchanges can be complex if you don't know what you're doing.
You need to follow the rules or risk losing the tax deferral status and be hit with capital gains tax.
So, let's quickly touch on the 1031 exchange rules, including the 1031 exchange timeline.
Looking to learn more about how 1031 exchanges work, including a detailed breakdown of the 1031 exchange rules and the four types of 1031 exchanges? Read our guide: IRS 1031 Exchange Rules: Everything You Need to Know.
And learn more about 1031 exchange rules specific to California: 1031 Exchange Rules in California.
Here's an infographic that breaks down the five main 1031 exchange rules:
1. Must Be a Like-Kind Property
Like-kind property essentially means the property you're buying in the exchange must be similar to the one you're selling.
The rules for what this means is a bit vague, so much so that most two of any properties are considered like-kind.
2. Must Be the Same Taxpayer
Whether it's a company or an individual investor, the entity who sells the property in the exchange and the person who purchases the new property in that same exchange must be the same taxpayer.
3. Must Be an Investment or Business Property
You cannot do a 1031 exchange with personal property. According to the Tax Cuts and Jobs Act, "Section 1031 now applies only to exchanges of real property and not to exchanges of personal or intangible property."
4. Must Be of Equal or Greater Value
To get 100% tax deferment on your exchange, the property you're purchasing must be of equal or greater value. If it's not, you'll pay capital gains on the difference between their value.
5. The 1031 Exchange Timeline
At the heart of the 1031 exchange is the 1031 exchange timeline, which dictates how a 1031 exchange is performed.
The timeline needs to be adhered to from beginning to end, most notably at the 45-day and 180-day markers, or you can lose the 1031 exchange status and be on the hook for the full capital gains tax.
Here's a 10,000 view of the 1031 exchange timeline to better understand:
And here's a quick summary of important points during the timeline:
- First day: Hire a qualified intermediary to oversee the sale of the exchanged property.
- Day 45: You have to select three potential replacement properties by this date, one of which will be the property you purchase as part of the exchange.
- Day 180: The final day of the exchange period. By this date, you must have chosen your exchange property and completed the exchange.
Keep in mind that this is a broad overview of the process. There are details to keep in mind throughout every part of the timeline and within each rule.
For a comprehensive guide to the 1031 exchange timeline, including tips for making every stage of the timeline smooth, read our guide: 1031 Exchange Timeline: How the IRS 1031 Exchange Process Works.
Part V: Choosing a Property Management Accounting Software
So far, you've learned vital information needed to tackle your property accounting that both reduce time and maximize profit for you and/or your clients.
However, nowadays, you're doing yourself a great disservice if you're not using accounting software of some kind.
Accounting software not only automates much of what was once repetitive manual input work but also makes new things possible. It does it all quickly, conveniently, and neatly.
An accounting solution can track deposits, record rent payments, do payroll, and issue vendor and contractor invoices.
Even if you have an outside accountant, you're going to want quality accounting software you can plug everything into.
Try a Property Management Accounting Software
Want a partner that will make your accounting—and all property management operations smoother? Schedule a free Demo today.
DoorLoop offers a full suite of accounting tools that allows you to track, manage, receive, and pay everything from one single, convenient dashboard, which offers these features and more:
- Enjoy a complete chart of accounts and robust reporting tools
- Print checks for vendors and owners
- Receive rent automatically each month
- Reconcile bank accounts
- Set up integration with QuickBooks Online in just minutes
Frequently Asked Quesitons
What is the meaning of property management accounting?
Property management accounting involves managing the financial operations of rental properties, including tracking income, expenses, and ensuring accurate financial reporting for residential, commercial, or mixed-use properties.
What is GAAP in property management?
GAAP, or Generally Accepted Accounting Principles, in property management refers to the standard framework of guidelines and rules used for financial accounting and reporting in the industry. These principles ensure consistency, accuracy, and transparency in financial statements and records.
What does a property accounting manager do?
A property accounting manager oversees the financial operations of rental properties, including managing budgets, tracking income and expenses, preparing financial reports, ensuring compliance with accounting standards, and handling tenant accounts.
What is a general ledger in property management?
A general ledger in property management is a comprehensive record of all financial transactions for a property, including income, expenses, assets, liabilities, and equity. It serves as the central repository for accounting data and supports the creation of financial statements.
Is property management accounting hard?
Property management accounting can be challenging due to the need for detailed tracking of various financial aspects, including rent, expenses, budgets, and compliance with regulations. However, with the right softwareand knowledge, it can be effectively managed.