How Does Professional Accounting Aid Property Investment?
Pursuing a real estate investment can complement your long-term investment strategy; however, property ownership brings additional financial obligations, like managing the costs associated with mortgage, maintenance, rental income, capital expenditures, and tax. Without adequate financial records, it becomes difficult to understand the profitability of a real estate investment.
That's where a CPA for real estate investors comes in. Accounting professionals understand the financial intricacies of the real estate investment and help property owners understand their financial situation, organize their records, and consider the tax implications of buying, renting, refinancing, or selling a property.
Our team at Anchor Up CPA Corp. understands no two investors have the same financial goals. Whether you are an individual real estate investor, owning just your first rental property, or a successful real estate investor with multiple properties, you will benefit from a personalized accounting service to guide your financial decisions and assist you in preparing for the next opportunity.
Why do Real Estate Investors Need a CPA?
Financial decisions pertaining to real estate can impact you for several years. While a property can help you generate rental income, it may also lead to a number of expenses; the amount remaining after mortgage and operating expenses may not represent the income taxed.
Accounting professionals can help you understand the aforementioned differences.
These activities are not just about doing paperwork at tax time. This is an opportunity to evaluate an investor's position and understand how financial decisions may affect them.
Understanding Rental Income and Taxable Profit
Rental income is perhaps the most prominent aspect of property accounting. As a general rule in Canada, property owners must disclose their rental income to the Canada Revenue Agency (CRA) and claim related expenses.
Rental income does not necessarily equal taxable profit.
For example, a property may have annual rent roll of $36,000. The owner may also pay property taxes, insurance, repair and maintenance costs, management fees, and mortgage interest. Not all of these expenses will affect the taxable profit of the property.
A CPA may be able to help organize and analyze these figures.
Which Rental Property Expenses Should Investors Track?
Expenses that may be deductible from an investor's taxable profit may include, but are not limited to:
Investors should keep invoices and receipts for these expenses.
It is also important for investors to keep their mortgage statements to distinguish interest expense from principal payments.
Interest may be deductible when the relevant conditions are satisfied; however, the main portion of a mortgage payment is generally not deductible as a rental expense.
Improvements that extend the useful life of a property or significantly improve the property may be required to be treated as a capital expenditure rather than as a repair.
Distinguishing between a capital improvement, repair or ordinary maintenance expense is sometimes very subjective and requires a CPA with real estate experience to provide an opinion.
When preparing to purchase an investment property it is imperative to determine how the property will be used and how it will impact the bottom line. Closing costs and the mortgages payment are not the only expense incurred when acquiring a new investment property. Costs such as insurance, repairs, and maintenance need to be factored into the expected return as well. A CPA can project expected costs and potential savings to help make an informed investment decision.
The investor's particular situation should be the determining factor in making this decision. General assumptions, such as a corporation always being more tax-efficient, should not be the main factor in making this decision.
Financial management becomes significantly more complicated when an investor holds multiple properties. Each property has its own terms, income, expenses and cash flow. Even a financially successful portfolio can have cash flow constraints because of unexpected repairs or a loss of tenancy.
A CPA can review a property investor's cash flow to help determine:
Separate records for each property help an investor easily determine which are the best performing properties and which may be underperforming.
This information is useful when deciding if a property should be sold or if a new property should be purchased.
Tax Consequences When Selling an Investment Property
Tax consequences are important to consider when a property is sold. Amounts actually realized from the sale may not be fully realized for tax purposes. Adjusted cost base, acquisition and disposition costs, capital improvements, and other items need to be taken into account.
Recapture may also apply if CCA has previously been claimed.
The sale of a long-term capital investment property may be treated differently than the sale of inventory property.
Property owners should be aware the sale of their real estate may raise GST/HST concerns. Treatment depends on the nature of the property and the transaction, so it should not be assumed that the sale is treated the same way as another.
Planning a sale provides the opportunity for an investor to understand the potential tax consequences and prepare for the cash outflow.
How a CPA Can Support Real Estate Investment Decisions
A CPA can help an investor with their analysis of potential taxes based on their various investments.
A CPA may help review the financial statements for cash flow and assist with various projections and plans the investor may have such as determining if a property is an adequate investment based on cash flow. A CPA may assist with the preparation of financial statements to support a request for a bank loan.
A CPA may help compare investments based on cash flow to support a plan for the best course of action.
Why Choose Anchor Up CPA Corp.?
At Anchor Up CPA Corp. we believe there should be a balanced approach of practicality and innovation to account for the realities of each individual investor.
located in British Columbia, provides services that assist customers in organizing their financial documents, understanding their tax obligations, and planning for their business and investment needs.
Our firm offers:
Many investors find it useful to have organized financial documents when considering the purchase of a new rental property or when evaluating the financial performance of their property portfolio. The sale of real estate is a taxable event, and being prepared can help ease the uncertainty.
We understand the importance of considering taxes and financial impacts as part of the decision-making process for real estate investors and can assist you in maintaining the records and understanding the expenses relevant to your investments. The resources available can help investors determine their obligations and manage them more confidently. We provide tax planning for real estate investors. We also have a CPA for real estate investments in British Columbia.
Our objective is to help you achieve your financial goals by providing tailored solutions for your property investments and planning needs and fulfilling your accounting requirements. Complete our Get a proposal form on the website to have a free, no-obligation discussion about how we can address your accounting needs.
