Purchasing a rental property involves more than just entering the sales price into your accounting software. Investors are typically faced with a complex web of closing costs that can be immediately deducted and other expenses that need to be amortized or depreciated over time.
While QuickBooks is a popular choice for business accounting, it wasn’t designed specifically for rental property management. This can lead to challenges when trying to properly record property purchases, track expenses, and generate accurate reports for your real estate investments.
However, it’s still possible to use QuickBooks to record the purchase of a property. In this post, we’ll walk you through the process, addressing common pain points along the way.
We’ll also explore whether QuickBooks is the best solution for landlords, or if Stessa might be a more tailored alternative to meet your specific needs.
Getting started
Before you can record the purchase of your rental property in QuickBooks, you need to set up your accounting system correctly. This involves creating a “company” and establishing a “chart of accounts” tailored to rental property management.
Setting up a company in QuickBooks
- Open QuickBooks and select “Create a new company.”
- Choose “Real Estate” as your industry.
- Enter your company name, typically the name of your rental property LLC.
- Follow the prompts to add your business address, tax information, and fiscal year details.
Creating a chart of accounts
A well-structured chart of accounts is crucial for accurate rental property accounting. QuickBooks offers a basic chart, but you’ll need to customize it for real estate investing.
Key accounts to include:
- Assets: Property value, accumulated depreciation, land value, checking and savings accounts
- Liabilities: Mortgage balance, security deposits, property taxes due
- Income: Rent received, late fees, other income (like pet rent)
- Expenses: Advertising, maintenance, insurance, property management fees, mortgage interest, repairs, property taxes, utilities, depreciation
To add new accounts:
- Go to Lists > Chart of Accounts
- Click “Account” > “New”
- Choose the appropriate account type (e.g., Income, Expense, Asset)
- Name the account and provide a description
- Save and close
Pro tip: Consider setting up separate sub-accounts for each property if you own multiple rentals. This allows for easier tracking of income and expenses per property.
Remember, setting up your chart of accounts correctly from the start will save you time and headaches later. It’s the foundation for accurate financial reporting and simplified tax preparation.
With your company set up and a chart of accounts in place, you’re now ready to record the purchase of your rental property in QuickBooks.
Recording the purchase
Now that your QuickBooks is set up, we can begin to record entries to handle transactions related to the original property purchase. This process involves several steps to accurately reflect the acquisition in your accounting system.
Steps to record property acquisition in QuickBooks
- Create a new vendor for the property seller.
- Record the down payment.
- Enter the mortgage details.
- Record closing costs.
- Allocate the purchase price between land and building.
Crunching the numbers
Let’s walk through these steps using a hypothetical example. Assume you’re purchasing a rental property for $250,000 with the following details:
- Down payment: 25% ($62,500)
- Land value: 20% of purchase price ($50,000)
- Building value: 80% of purchase price ($200,000)
- Mortgage: $187,500 at 7% interest
- Closing costs: 2% of purchase price ($5,000)
Here’s how to record this in QuickBooks:
1. Create a new vendor named “Property Seller” (or use the actual seller’s name).
2. Record the down payment:
- Create a check for $62,500
- Choose the account: Escrow Account (Other Current Asset)
- Choose the payment account: Your Bank Account
This will decrease your bank account balance and increase your escrow account balance by $62,500.
3. Record the property purchase:
- Create a bill for $250,000 from the “Property Seller”
- Split the amount into:
– Land (Fixed Asset): $50,000
– Building (Fixed Asset): $200,000
- In the “Pay from” field, split between:
– Escrow Account: $62,500
– Mortgage Payable: $187,500
This will increase your Land and Building assets by $50,000 and $200,000 respectively, decrease your Escrow Account by $62,500, and increase your Mortgage Payable by $187,500.
4. Record the mortgage:
- Create a new loan account under Long Term Liabilities
- Enter the principal amount of $187,500
- Set up recurring mortgage payments (principal and interest)
5. Record closing costs:
- Create a check or bill for $5,000
- Choose the expense account: Closing Costs
- Choose the payment account: Your Bank Account
This will increase your Closing Costs expense and decrease your Bank Account balance by $5,000.
After completing these steps, your QuickBooks will show:
- Land asset increased by $50,000
- Building asset increased by $200,000
- Mortgage liability increased by $187,500
- Bank account decreased by $67,500 ($62,500 down payment + $5,000 closing costs)
- Closing costs expense increased by $5,000
This example provides a basic framework for recording a property purchase. Remember, real estate transactions can be complex, and your specific situation may require additional steps or different allocations. It’s always advisable to consult with an accountant or tax professional to make sure you’re recording everything correctly.
QuickBooks’ quirks for rental properties
As you’ve seen, recording a property purchase in QuickBooks involves multiple steps and a solid understanding of accounting principles. While QuickBooks is a powerful tool, it wasn’t specifically designed for real estate investors, which can lead to some challenges.
Let’s explore some other common QuickBooks quirks that landlords often encounter:
Property-specific reporting
QuickBooks doesn’t naturally separate income and expenses by property. You’ll need to set up classes or locations for each property and consistently use them for every transaction to generate property-specific reports.
Handling security deposits
Security deposits are liabilities, not income. You’ll need to create a separate liability account and manually track when deposits are received, held, and returned or applied to damages.
Tracking capital improvements
Distinguishing between repairs (expenses) and improvements (which increase property value) can be tricky in QuickBooks. You’ll need to carefully categorize each transaction and potentially adjust your fixed asset values.
Schedule E preparation
While QuickBooks can generate helpful reports, it doesn’t directly produce a Schedule E for your tax return. You’ll need to manually transfer information from QuickBooks reports to your tax forms.
An alternative to QuickBooks built specifically for tracking rental property finances
While QuickBooks can be adapted for rental property accounting, there’s a more tailored solution designed for landlords and real estate investors: Stessa.
Stessa doesn’t have the quirks and challenges you might face with QuickBooks, offering a more straightforward approach to rental property accounting. Here’s why Stessa might be the better choice for your real estate investments:
1. Purpose-built for real estate
Unlike QuickBooks, Stessa is designed from the ground up for rental property accounting. This means you don’t need to mess around with a general accounting system to fit your needs – everything is already optimized for landlords.
2. Automated income and expense tracking
Stessa can automatically categorize your income and expenses, saving you hours of manual data entry. It connects directly to your bank accounts and credit cards, helping to ensure your books are always up-to-date.
3. Property-specific reporting
Generate detailed financial reports for each property with just a few clicks. No need for complex setups or manual allocations – Stessa handles this automatically.
4. Simplified tax preparation
Stessa makes tax time easier by generating tax-ready financial statements and even a Schedule E worksheet, significantly reducing the time and effort needed to prepare your tax returns.
5. Real-time performance dashboards
Get instant insights into your property’s performance with Stessa’s intuitive dashboards. Track key metrics like cash flow, ROI, and occupancy rates at a glance.
6. Integrated banking solutions
With Stessa’s landlord banking, you can streamline your entire financial management process. From recording property purchases to managing daily transactions, everything is integrated into one user-friendly platform designed specifically for landlords.
Want to spend less time on rental property bookkeeping?
Get started with Stessa for free today and see how much faster you can manage your rental accounting.
