How to keep track of every penny received and spent and properly account for your passive income
In this article you'll find answers to the following:- How this affects your bookkeeping
- Setting up an entity
- Recommended Accounting Systems
How this affects your bookkeeping as an insurance agent?
Short answer: it does not! Having rental income will not affect your agency's financials however it does affect your taxes! Every tax season our Tax Team diligently asks if you have any additional income, whether you have an LLC (and a partner) and whether you own the building as this all is included in your personal taxes. When it comes to your year-end bookkeeping, all you need to ensure is that you've tracked your rental income and all of it's expenses...but more on that below!
Setting up your entity
As a landlord, you’re operating as a sole proprietor, which means there is essentially no divide between your rental income and your personal income (this of course is an automatic election when you become an insurance agent). The most common entity set-up for rental properties is an LLC (or limited liability company) which is another legal business structure that landlords can use for their real estate investments.
LLCs are known for “pass-through taxation,” which means that the business doesn’t pay taxes; instead income is passed to the member(s) to report on their personal taxes (just like a sole proprietorship). Members must also pay self-employment tax, which corporations do not do.
Like a corporation, an LLC helps to shield your personal assets or property from being seized if you run into debt or tenant legal issues. LLCs also allow for a property to be distributed easily after you’ve passed away; beneficiaries simply receive a certificate to illustrate their stake in the property.
If you're set up as an S-Corp or LLC for your insurance agency, you're already familiar with the general costs and timeline of setting up an entity, and it's no easy task. However if you're looking to have multiple properties in your portfolio it's absolutely something to look into!
Here at Club Capital, we love doing your business bookkeeping and preparing you for taxes however rental properties don't always fall under that umbrella! Here are a few alternatives we suggest looking into for storing documents and receipts for a paper trail, and generating accurate financial reports like an income statement and net cash flow report:
For more information on entity set-up and if you'd like to explore the option of using Club Capital to manage your rental portfolio, please reach out to your Account Manager!