A Quick Guide to Finances & Taxes and Your Real Estate Business
This is probably not going to come as a surprise to you, but you need money to run a successful real estate business! But the financial side of running a business is where a lot of entrepreneurs get stuck and fail. We want your real estate business to succeed, so here are our tips on staying financially healthy as a new real estate business owner:
FINANCIAL STEPS FOR YOUR REAL ESTATE BUSINESS
Get a Business Bank Account
You must keep your business and personal finances separate. It will make your administration and financial management easier, plus it’s a legal requirement for protecting your assets. Talk to your bank about setting up a business account for your real estate company.
Get a Certified Public Accountant (CPA)
A CPA is essential to running your business successfully. In addition to advising on taxes, preparing and filing your tax return and keeping taxes to a minimum, they can also provide financial advice. They will be able to instruct you on expenses, profitability, good financial management, estimated taxes and more.
Make Sure You Have Savings in Place
There’s nothing as stressful as relying on your new business to give you enough money to pay the bills. Your real estate business probably won’t be successful straightaway. That’s why it’s essential to have savings in place so you can meet your living expenses until your business brings in decent revenue. We recommend having between three and six month’s worth of expenses saved up, the more the better.
Get Financing for Your Business
In some cases, you may need to get financing to start your real estate business. Your best option is probably to go to your bank and ask for a loan. If you decide to do this, you must have a solid business plan, revenue and finance projections and a plan to pay back any money you borrow. The Small Business Administration also lists financing you may be eligible for.
Set up Merchant Accounts to Accept Debit and Credit Cards
If you want to take debit and credit card payments, you have a few options. You can use integrated services like Square, PayPal, Stripe, etc or you can create your own merchant accounts. You will need to use one of these options if you want to accept cards. As a realtor, your income is likely to come from bank drafts, so carefully consider if you need card processing.
Get Accounting Software
Bookkeeping and accounting software is essential for keeping track of your real estate business finances. Good financial management is vital to your peace-of-mind and online accounting software will give you the insight you need. There are plenty of options to choose from, with some popular ones being: QuickBooks, FreshBooks, FreeAgent, ZipBooks, Wave Accounting, Xero, Bench and more.
TAXES FOR YOUR REAL ESTATE BUSINESS
Taxes are a fact of life and if you’re in business there are various ways you will need to file and pay them.
- File with the IRS — let the IRS know you are setting up a business.
- Federal income tax — you will need to pay income tax on any profits or earnings you take from your real estate business. In most cases, profits from the business will “flow through” to your individual tax return and you will be taxed there.
- Self-employment tax — unlike employees, the earnings from your real estate business will be taxed under a self-employment tax (FICA and Medicaid). This is just over 15% of your earnings.
- State tax — most states do have a state income tax. If yours does, you will be taxed on your earnings as normal. To register for state tax, see your Secretary of State website.
- Payroll tax — if you pay employees, you will be liable for payroll tax.
- Corporation tax — if you incorporate as a C Corporation, you will also need to pay corporation tax — you will be taxed both on your profits as a business and when you extract earnings from your company. This “double taxation” is one of the reasons we normally recommend LLCs as a good business structure, since they avoid this.
- Sales tax — if you’re selling locally you may also be liable for collecting and paying sales tax. To register for sales tax, see your Secretary of State website. As a real estate business, check with your accountant on whether you will need to collect or pay sales tax.
- Other taxes — in certain circumstances, you may need to pay some other types of taxes. Talk to your accountant to find out what else you may be liable for. There are likely to be other costs, taxes and fees related to buying and selling property. Talk to your accountant.
As a rule of thumb, we recommend keeping back around a third of your earnings to pay your taxes. We can help you with your business accounting.