House Hack Accounting Help

General Landlording & Rental Properties
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House Hack Accounting Help

Ben Pearce
Rental Property Investor · Hudson, WI · Member since 2020 · 6 posts · 3 votes

My wife and I will be house hacking with a duplex once we close at the end of January. I have some questions around paying the mortgage and also about the use of a business credit card. 


I currently understand the importance of keeping personal/business transactions separate. I will be opening a separate checking/savings account for the other side of the duplex to house rent income and property related expenses. One of my main questions with this then is what my best route is going to be to pay the mortgage. The total monthly payment will be pretty close to this: P&I - $1,295, Taxes - $420, Insurance - $175, PMI - $220, for a grand total of around $2,100/m. We expect to bring in $1,200/m in rent for the other half. If we only have $1200 coming into the rental account as income what is the best strategy for paying the mortgage? Setting up two separate payments (the $1200 coming from the rental account & the difference coming from our personal account)? Making one payment by transferring the difference into the rental account each month from our personal account? Or vice versa by transferring the $1200 to our personal account and paying that way??

Secondly I am questioning the use of a business credit card to charge expenses of the rental property. On top of having a separate checking/savings for each rental property (we intend to purchase more), I am curious as to how some of you more experienced investors scale with using a credit card for expenses? Would I open another card for each property like with checking/savings accounts? Or use the same card for all properties and reconcile expenses for each property at the end of the month and pay accordingly from each? 

Sorry for the long post, I have so many questions as a new investor. Any advice is appreciated, thanks!

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Bob NortonPro Member
Accountant · Slidell, LA · Member since 2019 · 382 posts · 272 votes
5y

@Ben Pearce A house hack with a duplex is actually rather simple.  Any expenses for your property that is shared by both sides is split 50/50, such as insurance, mortgage interest, property taxes, or major repairs such as roof replacement (which has to be capitalized and depreciated).  Any expense that you spend specifically for the rental side, such a repairing the plumbing or replacing a light fixture, is expensed against the rental income.

How you pay the mortgage does not matter.  You can pay this from your personal account.  You can transfer the funds from your rental account to your personal account each month.

Having a separate checking account for your rental side is a good idea, so that you can easily track any expenses specifically for that side of the house and directly deductible from your rental income.

I setup a checking account for each property I own and use a debit card for the account for any specific purchases.  If I need to purchase something that exceeds the balance in the checking account, I either transfer funds from my personal account into it, or I charge the expense on my credit card.  If I use the credit card, I repay myself from future rents.

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  • Bob NortonPro Member
    Accountant · Slidell, LA · Member since 2019 · 382 posts · 272 votes
    5y

    @Ben Pearce A house hack with a duplex is actually rather simple.  Any expenses for your property that is shared by both sides is split 50/50, such as insurance, mortgage interest, property taxes, or major repairs such as roof replacement (which has to be capitalized and depreciated).  Any expense that you spend specifically for the rental side, such a repairing the plumbing or replacing a light fixture, is expensed against the rental income.

    How you pay the mortgage does not matter.  You can pay this from your personal account.  You can transfer the funds from your rental account to your personal account each month.

    Having a separate checking account for your rental side is a good idea, so that you can easily track any expenses specifically for that side of the house and directly deductible from your rental income.

    I setup a checking account for each property I own and use a debit card for the account for any specific purchases.  If I need to purchase something that exceeds the balance in the checking account, I either transfer funds from my personal account into it, or I charge the expense on my credit card.  If I use the credit card, I repay myself from future rents.

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  • Manuel De La CruzPro Member
    Rental Property Investor · DMV · Member since 2021 · 6 posts · 1 vote
    4y

    *Fledgling investor here* I am running into this as well. (VA Loan House Hack) However, I have a C-Corp established to take the rental income (intend to also use for business operating expenses) from the new tenant(s) and a business checking and savings account established in the name of the corporation. Would it be best to establish additional savings accounts to hold deductions from my anticipated operating expenses (management, maintenance, misc)? How would I properly pay myself the cash flow from the property(ies) [more to come in the future] from my C-Corporation.

    What would be the best method to maximize tax savings from a business and personal tax perspective? @Ben Pearce how has this worked out for you this year? @Bob Norton any tips for accounting for a new investor?

    Any advice is greatly appreciated!

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  • Bob NortonPro Member
    Accountant · Slidell, LA · Member since 2019 · 382 posts · 272 votes
    4y

    @Manuel De La Cruz Are you using the C-Corp as your property management company, only, or did you also purchase or transfer the property into the C-Corp.  The problem with C-Corps are that they pay corporate income taxes and then when you pull money out of them, you have to pay taxes again.  Also, if the C-Corp generates losses, then those losses get hung up in the C-Corp to offset future income of the C-Corp and you cannot use them on your personal tax return.  So, I recommend that you manage it carefully to make sure that you run as close to breakeven as possible.

    The second issue with any corporation (including LLCs filing as S-Corps) is having the corporation own rental real estate. There are two parts to this issue. The first part is that if you want to move the property out of the corporation, then you'll have to pay tax on that transfer. Meaning, that if you want to move your property into another LLC that you own, you will have to recognize a taxable gain on the difference between the fair market value of the property and your adjusted basis - even though you did not actually receive any cash for the sale. This event will also occur if you elect to revert your LLC/S-Corp back to just an LLC. The second part is that you do not get debt basis for corporate debt. So, if you have an S-Corp and have a mortgage on your property and the rental has a loss (or you do a cost segregation), then you will not be able to deduct this loss once your capital basis is depleted. For those of us buying with no money down, this is a serious problem. You are not "at-risk", so you have nothing to lose (according to the tax rules). These losses are suspended and you get to offset future rental income from the S-Corp in the future.

    So, to your question about accounting tips for getting started, you don't have to spend a lot on software.  Setting up separate checking accounts for your business is the best way to keep your business expenses separate from your personal expenses.  You can use spreadsheets to manage your budget and books, initially.  However, as you grow these will get unwieldy and will cost you more time to maintain, probably to the point where you keep putting off the bookkeeping.  So, I recommend getting a low cost accounting software solution, so that you can learn how to categorize transactions while you have some time to learn that and, as you grow, you'll build data to help analyze your business.  For landlords, an good solution is Stessa and for any other business, a good solution is Xero.  Both of these are cloud-based software packages.  To make Stessa easy, you can setup a checking account for each rental property you own and link those transactions to the property in the software.  Xero allows downloads from your bank and credit cards to help with data entry.  A lot of my clients use these packages, and also QuickBooks (for general accounting) and Buildium (for rentals).  If you will be scaling quickly, then you may want to consider upgrading to these packages sooner.

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  • Manuel De La CruzPro Member
    Rental Property Investor · DMV · Member since 2021 · 6 posts · 1 vote
    4y

    @Bob Norton, no the C Corp would be used for management only. The property will not transferred into the C Corp and not planning to own any real estate within it.  I should have clarified before.  Also thanks for the tips on the accounting software.  I'll definitely look into the various options around closing time.

    1Reply
  • Ama I.
    New to Real Estate · Madison, WI · Member since 2023 · 3 posts · 1 vote
    2y

    Hello - 

    I'm reviving this thread because I'm in a similar position with a recently purchased duplex. Trying to determine the best methods for setting up accounts/credit cards/& bookkeeping. @Ben Pearce, if you're willing, could you share more about how you navigated through your house-hacking accounting in the past 3 years? 

    Happy to connect via DM if that's preferred, too. Thanks!

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  • Jake BakerBusiness Member
    Flipper/Rehabber · San Diego, CA · Member since 2020 · 1k+ posts · 695 votes
    2y

    @Ama I.

    Is this your only property? 

    [email protected]
    BookkeepingRE - Bookkeeping for Real Estate & Service-Based Businesses58 Reviews
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