A real estate business is a complex and ever-changing entity. The market is constantly in flux, which can lead to big changes in the value of real estate assets and the financial statements that report on them. This can create genuine and unique challenges for most real estate business owners.
Here are two unique challenges of real estate accounting.
Financial Statement Reporting
Real estate businesses have many specialized transactions that must be accounted for properly on the financial statements. These include transactions like property purchases, sales, leases, and mortgages. Many of these transactions have several complex stages that must be accounted for, especially with businesses that own multiple properties or have complex ownership structures.
The company must account for each property separately on the balance sheet to help make informed business decisions. This information is also used by lenders when considering financing for real estate projects. If the financial statements are not accurate, it can lead to some serious repercussions that you might not be able to recover from.
Another challenge with financial statement reporting is disclosure requirements. Real estate businesses are required to disclose certain information about their transactions and activities in the footnotes to their financial statements.
The industry is a highly regulated industry with many unique rules and regulations. If you don't disclose the proper information in the footnotes, it could result in an audit from the SEC or other regulatory bodies.
Real estate businesses have to contend with a complex web of tax laws. Federal, state, and local taxes must be paid on real estate transactions. The tax laws are constantly changing, so it's important to have a good accountant who knows the ins and outs of real estate taxes.
Real estate businesses also have to deal with property taxes. This can be a significant expense for companies that own multiple properties. Property taxes are typically assessed based on the value of the property. This can be challenging, especially if the property's value has recently changed.
Another tax-related challenge for real estate businesses is depreciation. Depreciation is an accounting method that allows businesses to expense the cost of certain assets over time. This is important for real estate businesses because it allows them to deduct the cost of property improvements over time.
However, estimating the proper depreciation expense can be difficult, especially for complex real estate projects. For example, a real estate development project that spans multiple years can be difficult to depreciation properly. The real value of the project may not be realized until it is completed and sold. This can create a real challenge for businesses when they need to file their taxes.
These are just a few of the unique challenges that real estate businesses face when it comes to accounting and tax reporting. Be sure to have a good accountant who's already familiar with the real estate industry and can help you navigate these challenges.
Contact an accountant to learn more about real estate accounting services.