How the Money Flows (New to investing)

[Chris Leppanen]

Hi there everyone! 

So I've been doing a lot of research and I was just wondering if someone could explain the general way money would flow from a cash flowing property and into either my, or the business bank account tax free. (Not sure which account is normally used with other investors) Also how are the books done and when? Do you have property managers handle the rent payments then at tax time they hand it off to the CPA? What about book keepers? Sorry for such a jumbled question but I'm just trying to get the framework down in my mind.

Thank you so much everyone in advance this helps so much!

[David M.]

@Chris Leppanen

There are a bunch of recent posts on the bookkeeping in bp.

Bookkeepping is bookkeeping, honestly.  Hasn't changed in centuries, but I know the "younger" generations aren't do much of it.  Do you balance your "checkbook?"  Do you write down your transactions?  That's bookkeepping.  Somehow it has to be done.  You can pay somebody else to do it, but then you still have to tell them "what" to write down.  Personally, I think that's silly.  Some people I think limit their rental transactions to a single credit card and/or bank account.  I guess that works until you have more than one rental or many rentals -- you either have lots of accounts or still have to distguinish which transaction is associated with which property.

If you own the property personally, you don't need a business bank account. Its really only if you have a legally entity, such as a LLC. This goes back to bookkeeping --- you can have all the funds co-mingled in a single bank account (check with your State laws, however, about how to hold security deposits). You just need to write down how much you take in for rent and how much you expend on each property as a bookkeeping task so that your taxes can be prepared correctly. Also, its good to know how much money you are taking in vs. how much is going out... kinda a basic "business thing..."

As far as money flow and "tax free...."  Like I said, if you hold Title in your personal name you don't need to worry about separating the funds.  Its only the legal entity that you have to...  As for the "tax free" part, since passive rental investing is considered a business (or "like a business" since its specifically categorized by the IRS as a "passive investment" activity) for tax purposes, you can deduct most of your related expenses for that rental property.  For example, mortgage interest payments, depreciation, utilities, legal and accounting fees, property management, repairs, etc.  For example (very simply), lets just say you earn 100 in rent.  You have 60 in mortgage interest payments (you can't deduct principal portions of the payments), now you have a "profit" of 40.  You get taxed on that 40 on your 1040 form.  If you are actually negative, you "basically" canNOT bring that deduction onto your 1040.  Many people try, but its not easy or realistic for most people --- many posts on this, too, and would be a separate topci to type out...

Oh as for timing, I do me bookkeeping/record keeping as I go...  But, I also self-manage.  Property managers as I hear will give you a monthly statement so you'll have it writing.  However, you tax preparer will stay have to put all those numbers together.  I do my bookkeeping in Excel and categorize the rent and expenses as they would go on the tax form, SchE.  The spreadsheet sums them up by category and all I do is copy/paste them onto the form --- I prepare my own returns, too.

Hope this helps.  I'd be happy to chat if you think that would help.  Just send me a direct message.