Quickbooks: Real Estate and Personal Bookkeeping Must Have

Bookkeeping used to be my nightmare

I recently started using Quickbooks (referral link with 50% discount) for all personal finance and real estate bookkeeping. Now, I wish I did this a long-long-long-long time ago!

Prior to Quickbooks, I used an Excel-based manual process. I logged into online banking once a month and downloaded transactions. Then, I copied them into an Excel template. Assigned a category to each transaction. Refreshed my pivot tables and reviewed the results. Seems easy?

This process actually took an incredible amount of time! With every new rental property I purchased, the work-load increased. The volume steadily grew to an average of 300 transactions a month coming from 27 bank accounts. I was spending roughly three work days a month on data entry and review. And by the time I was done, the next month was already midway! Ughh...

Quickbooks gave me my time back!

I signed up for Quickbooks and linked it to all my bank accounts. So that all income and expense transactions automatically flowed into QuickBooks from CIBC, RBC, NBC, Scotiabank, BMO, Equitable, Questrade, CapitalOne, etc. No more download or copy-paste was needed.

Quickbooks keeps me organized!

In addition, I created auto-rules to categorize the incoming transactions from the feeds into the appropriate categories and classes. Most of the data fell into the buckets I needed all by itself. As for the remaining transactions, Quickbooks app lets me classify them on the go. For example, while I wait to pick up my son from Karate, I open the app and swipe things into places. Bookkeeping happens naturally in real time.

Quickbooks helps me collect rent!

Another feature I love is reporting! The Customer Detail report shows me the rent roll. I can easily see all completed and missing rent payments when I run current and past months data, side by side. It takes me just a couple of seconds to follow up on outstanding rent payments. I issue invoices for past-due rent and keep track of all the catch-up payments as they come in - all tenant activity is in one central place.

Quickbooks keeps me accountable!

The moment I log in, I know my income, expenses, and net profit or loss exactly, to the penny. I can drill into data by property, tenant, partner, company, time period, etc. I use insights from QuickBooks to plan on how to become financially independent sooner.

Quickbooks knows if I spend more or less than I make; 

if my assets are cash positive or negative; 

if my net worth is rising or falling. 

Quickbooks helps me make the decisions that are right, not the ones that are easy.

If you'd like to give Quickbooks a try, use this link to get a 50% discount.

Hope you love this tool as much as I do! Let me know how it goes :)

Real Estate Investing Tax Traps

I was at a great seminar last week. One of the speakers, a super knowledgeable tax guru and ex-CRA-auditor, shared several tips about potential tax traps real estate investors can fall into.

Taxes can get pretty fat, so it's always great to learn some ways to keep them skinny. Posting my notes here just in case you'll find them helpful.

Tax Trap #1 - House Flipping

Suppose, the following flip scenario: we buy at 400K, renovate for 100K and sell for 650K. This results in 150K capital gain, half of which is taxable.

Let's say our tax rate is 50%. We'd then pay 37.5K in taxes and pocket 112.5K of after tax profit.

DANGER: Flip with incorrect Tax on Capital Gain calculation -
larger profit than in reality

Except!

Most people don't realize that per Canadian Income Tax Act, there are two distinct categories of property:

1) Inventory, which creates business income or loss

2) Capital, which creates capital gain or loss.

The distinction is based on whether or not a property is acquired and used on account of income or capital.

Taxes Payable - Personal Name

It turns out that, when you purchase a property with the intention to renovate and flip, you put yourself into a business income situation.

Capital gain is not applicable since you have a clear intention of selling the property. In this case, your property is your inventory. So sales proceeds are your income. You have to pay tax on 100% of your income. You cannot take advantage of the 50% capital gain tax inclusion rule.

In the scenario above, if you purchased the property in your personal name (not under a corporation), your taxable income is 150K, tax is 75K and your actual after tax profit is 75K (not 112K).

If you are not aware of this tax trap, there is a HUGE risk of spending 112K profit and then being stuck with a large tax debt of 37K.

REALITY: Flip with Tax on Income - much lower profit

Please note that purchasing in corporate name can save you a lot of taxes. So this example and tax trap would not be applicable, if you manage your corporate taxes well.

Tax Trap # 2 - Condo Flip

On condo flips, investors can fall into an even deeper tax trap.

First, as in the previous example, all of earned income is 100% taxable since condo is considered to be inventory.

In addition, investor must repay GST, if he/she had received it when purchasing the condo from the builder. Even though GST repay is just a return of the money recently received, the danger is that one would have already spent it by the time they'd need to pay it back.

The next catch is that HST is applicable on new properties. Investor would have to pay 13% HST.

Lastly, as per the linked article, CRA is on top of improper tax payments (ie. capital income vs. business income issue) and would apply a penalty up to 50% of tax payable for tax avoidance to anyone who reports tax incorrectly on their new condo flip.

All in all, a condo flip may end up being a loss rather than a profitable deal, once all these adjustments are applied.

For example, if we purchase a new condo for 400K (including tax rebate) and sell it for 500K. Applying capital gain tax only, you might erroneously think that you'd only pay tax on 50% of 100K capital gain, which would result in 75K profit.

DANGER: New Condo Flip with Incorrect Tax Calculation
- looks like a profitable deal

In reality, after we apply all the adjustments that an investor might have missed, we end up with a loss of 12K.

REALITY: Loss on a New Condo Flip due to Taxation Error

Bottom Line

The bottom line is that many new investors might not know about these potential tax traps and might lose money. 

The only way to avoid these tax traps is to keep educating yourself and find a way to get advice from knowledgeable accountants and tax advisors, who have applicable experience and know exactly how to navigate around these and other potential tax traps.

Hope you find this post helpful. Please share, like or forward to your friends and fellow newbie investors if you did!!!

Cheers! 

Is it Accounting or am I really just not making much money?

Over the past 3 years, I've come up with a very detailed approach for keeping track of all finances. First, I download all banking transactions into a gigantic Excel template every quarter. Then I assign a "Category" to each line, which automatically puts all transactions into various additional buckets. I then refresh a pivot table and "Voila!" - a chart sorted by property, showing gross, then expenses and the bottom line.

This worked fine initially and I was quite proud. Lately, I noticed that the chart doesn't actually answer a simple question: How much money am I making? or losing? or wasting?

I realized that this is because in my home-made Excel template I treated CapEx the same way as all my operating expenses. I would just subtract capital expenses out of the gross. Because of this, I couldn't tell if the property was profitable on a day-to-day basis or not.

I went through a painful thinking process and came to a simple conclusion. If I put my data into conventional financial statements: "balance sheet" and "income statement", I can see much clearer how the business is doing. I can also see how every improvement I make (capital expense) affects my net income for years to come.

For example, if I get a new roof for 10K this year for cash. The "10K" disappears from Cash on the balance sheet under assets and re-appears under "CAPEX Roof" still on Assets side. Income statement for the same year doesn't include an operating expense for the roof at all. This was counter-intuitive to me initially because I was the one who personally gave away precious dollars to the roof guy. Now, I think of it as if  my "10K" is still with me and re-incarnated as a shiny roof.

Notice that I also pay taxes on the 10K as if my income actually included that cash this year and it wasn't spent on business needs.

However, roofs aren't eternal, so over the next 10 years, I will be deducting 1K "roof expense" on my income statement. This is called depreciation. Depreciation will decrease my income by 1K every year over the next 10 years, and decrease my net income and tax respectively as well. So I make up for the tax I paid.

Now, the benefit of this exercise is that I can see how my properties are doing on a day to day basis given just operating income and expenses. I also know that I have to plan better and have 10K set aside for all upcoming roofs and other big improvements.

Working through depreciation examples on the income statement helped me realize that CapEx for the roof (10K) is a big chunk of money. Even if I set money aside over 10 years, 10K / 10 = 1K is a large portion of my gross.  The reality is I can't pay "fake" money to the roof guy or ask him to give me an interest-free 10 year loan. It's on me to come up with the real money.