Whenever you buy or sell real estate, there are tax issues to be considered. Whether you own one or more homes, business property, or both, it’s essential to understand your accounting and tax obligations in the state of Utah.
Before we dive into things, we highly recommend that if you don't have a real estate tax accountant that you work with, get one! In this post, we will discuss real estate taxes and laws, and how an accountant that has experience with real estate laws can help you save on your taxes and make sure you are compliant.
At CMP, we assist many of our clients with tax and accounting issues related to real estate. For that reason, we’ve decided to put together this real estate accounting & tax guide to help you understand what you need to do – and how to do it – to ensure that your real estate holdings are compliant with Utah state law.
Real Estate Accounting
Real estate accounting is essential if you invest in real estate. If you’re buying and renovating properties to resell, you must keep track of your loan payments and expenditures. And, if you’ve bought a property to rent it out, you’ll need to keep track of your income and money spent on repairs. All of this is in addition to the usual things you would need to track, including utilities and property tax payments.
Business Banking
The first order of business is opening a business bank account. You might be tempted to mingle your business and personal banking, but that can lead to issues down the line. Keeping a separate bank account will make it very easy to integrate your bank transactions with your accounting system. You’ll have business checks and a business debit card, as well.
Books
Next, you’ll need to set up your books. Many investors choose to keep both an electronic record using software like QuickBooks as well as paper records. In addition to your books, you’ll also need to maintain copies of any documentation that supports what’s in the books.
Chart of Accounts
Setting up a Chart of Accounts will help you keep track of your business expenses by category. At the minimum, you will need these four categories:
- HUD
- Utilities
- Repairs
- Financing
You may want to add additional categories for rehabilitation costs, marketing, and research. That will depend on what’s happening with your investment properties and how you plan to use them.
Setting up a Chart of Accounts in QuickBooks is simple. You can find detailed information on the QuickBooks website here.
In addition to the properties you currently own, you should keep track of any properties that are on your radar as potential future investments. Any money you spend researching and evaluating these properties will go toward your company’s bottom line. Tracking them will enable you to measure their impact on your profits.
Additional Real Estate Accounting Tips
In addition to what we’ve already mentioned, here are a few other tips to consider as you set up the accounting for your real estate investments.
- To make your tax filings easy, consider aligning your bookkeeping categories with the information you’ll need for your Schedule E filing.
- Track the expenditures and income for each investment property separately under the umbrella of your investment company.
- Use cell phone apps to track things like mileage and receipts. You can also use the QuickBooks online app to enter transactions when they happen instead of waiting until you’re back in the office.
- Set up recurring transactions, such as mortgage payments, amortization, and depreciation, so they are entered automatically.
Setting up your accounts properly and making entries promptly will ensure that you always know where your business is financially. It will also make things much easier for you when you file your taxes.
Overall, there are a few crucial steps to getting set up for properly accounting for real estate assets. At CMP, we are experienced at handling these steps to get your real estate financial management on solid footing.
Real Estate Taxes
Filing taxes gets complicated when you have multiple real estate holdings. You’ll need to include any income from your properties on both your federal and state tax returns.
Federal Taxes
The most important thing to be aware of on a federal level is that there are many things that can impact the amount of taxes you pay. These include:
- How long you have owned the property
- Whether or not you live on the property
- How many properties you own
- Whether you have stand-alone properties or a real estate business
Here are some specific tips to help you save money on your taxes:
- If you own a property for less than a year, the money you earn from it will be considered income, and you may be charged as much as 37% plus state income tax of 5% of what you make. However, if you own it for more than one year, any profit you earn will be classified as a long-term capital gain, and that rate tops out at 20% plus state income tax of 5%.
- If an investment property is your primary residence, you can avoid capital gains taxes up to a certain point. To qualify, you’ll need to live on the property for two out of five years. That’s a total of 730 days. That might seem like a lot, but the days need not be consecutive for you to take advantage of this perk.
- If you earn more than half of your income from real estate, it’s likely that the IRS will consider your real estate holdings to be a business. That means you’ll need to pay regular income tax on them, and that includes the self-employment tax.
- You may be able to defer your tax bill using a like-kind exchange. That means you can sell one property and “exchange” it for another of similar value. Keep in mind that this is only a deferment, not a tax break.
- You can defer any capital gain from any investment by investing into a qualified Enterprise Zone Fund. Enterprise Zone Funds must qualify by investing in property in state-designated Enterprise Zones. Please contact the accountants at CMP to learn more about these investment funds.
As we mentioned above, you’ll need to file a Schedule E along with your 1040 filing to report your real estate income. Your best bet is to pay an experienced real estate accountant to handle your tax filings for you.
Utah State Property Taxes
In Utah, county assessors are required to reset property values every year. A detailed property appraisal must be performed every five years, at minimum. In the interim years, the last appraisement plus fair market value is used to determine the property value.
There are state-level tax breaks for owner-occupied homes. The standard deduction is 45%. That means that if you live in a property that’s valued at $500,000, the value for taxation would be $275.000. However, commercial real estate, second homes, and rental homes are taxed at fair market value.
Another important thing to keep in mind is that most properties are located in multiple taxing districts, and each district sets its own tax rate. Utah’s Truth in Taxation law lays out the tax requirements. The most important requirement is that taxing districts are required to hold public hearings and take other legal steps if they plan to increase taxes beyond the natural growth in the taxing district.
You can find all of Utah’s state tax forms here. We recommend hiring an experienced CPA or tax attorney to help you navigate state property and income taxes, particularly if you own multiple investment properties.
Accounting and Taxes in Real Estate are Tricky but Manageable
Utah real estate is popular because of the state’s natural beauty and favorable tax laws. As an investor or homeowner, it’s your job to make sure that you account for your real estate income and losses and file your taxes properly. The tips in this guide will help you do that.
At CMP, our experience navigating the world of real estate taxes can get you off to a great start in this industry. Call us today at (801) 467-4450 (SLC) or (435) 750-5566, or click the button below to schedule a time to talk.
