In the accounting business, you are tasked with offering advice involving many types of client business pursuits. Real estate is one of the more common investments made by clients. When taking that step, your customers become business owners. Purchasing a rental property changes the nature of how these clients approach their finances and tax planning. There are more expenses to track and hopefully more income to report. Your customers who have become new landlords need to wear a few more hats in their new venture. Be prepared to help them along as the transition from individual taxpayer to business owner begins.
Keep Track of Business Expenses
Individual taxpayers can deduct a range of expenses to reduce their personal taxable income. As new landlords, they must deal with two sets of deductions. Some taxpayers can be lax in tracking costs. Receipts get lost and some cash outlays simply slip the mind. Your clients might want to pay closer attention to insurance, maintenance, and repair costs to rental properties, otherwise they will end up paying more in tax than necessary to the Canada Revenue Agency. Some of the best advice you can give to landlords involves staying organized. Advise them to pay for business expenses by cheque or credit card whenever possible, creating a paper trail. You might suggest a customer embrace technology to sharpen focus. Numerous applications exist to help manage expenses and income that flow from rental operations. Programs such as QuickBooks Online provide a simple way to record rents and expenditures, preparing a detailed report for year-end reconciliation. In addition, mobile applications allow receipts to be scanned and uploaded to the cloud for easy retrieval. You probably want to recommend that clients take time to enter data each week or month. Pulling everything together at tax time presents a significant challenge.
Your customers probably realize that purchasing a rental property requires a significant dollar investment. Whether they finance or pay cash, that acquisition may be one of the largest assets in their portfolio. In that case, emphasize the need for insurance. Property insurance protects your customers from hazards that come in all forms. While small maintenance issues can be covered from cash reserves, an electrical fire can destroy the dwelling in minutes. Advise your clients to insure the property at replacement cost so a similar structure can be rebuilt in the event of a total loss. Property insurance policies also have a liability component. You want to inform customers that injuries incurred on rental properties by tenants or a passerby pose just as much of a financial threat as wind and water damage. These claims, if justified, can snowball to dollar amounts that exceed the property value itself. You should have a good handle on the ins and outs of rental ownership. Pass that knowledge along to your clients, even if that advice might extend beyond what they can deduct and what they can’t deduct.