Real Estate Investing

Understanding Investment Property Accounting

Understanding Investment Property Accounting

Accounting for an investment property can be a daunting task. Many investors rely on their accounting software’s default setup, which often includes columns for assets and liabilities but not much else. This approach may work well enough if you’re simply interested in tracking cash flow from your investment property, but to truly understand the performance of your property over time requires a more detailed analysis. In this article, we’ll discuss some of the basic components of an effective investor property accounting system including the importance of analyzing depreciation cost and using accrual accounting techniques.

The Elements of Investment Property Accounting

Investment property accounting systems are made up of four elements:

  1. Accounting software to keep track of income and expenses. This can be an Excel spreadsheet, or it can be a specialized app. The important thing is that you have one and that you update it regularly so that your records are accurate and up-to-date.
  2. Accounting software for capital improvements (CIs). If you’re going to make any major renovations or upgrades to the property, this is where they’ll go not into depreciation or EILs accounts yet! The reason we don’t want them there yet is that there’s no way of knowing what will actually happen until after the fact; if something goes wrong during construction, then all those costs might end up being worthless anyway!

So hold off on recording them until after completion. If anything does go wrong during construction (and trust me: it probably will), then at least your initial investment isn’t wasted money spent on anything but wasted time spent worrying about wasted resources used up during wasted efforts toward achieving absolutely nothing except wasting even more time worrying about how much money was wasted trying unsuccessfully.


Depreciation is a tax deduction, but it’s not the same as amortization. Depreciation is calculated by taking the cost of an asset and dividing it by its useful life. For example: If you buy a $10,000 piece of equipment with an expected lifespan of five years, your depreciation would be $20 per month ($10k/5). Once again, depreciation only applies to income-producing assets; if you buy a lawn mower for personal use at home or office rental space (like we did), then you cannot depreciate those items because they don’t generate any revenue for your business.

Capital Improvements

A capital improvement is a broad term that refers to any type of upgrade or addition that increases the value of your property. This includes everything from installing new windows to adding a gymnasium in the basement. In accounting terms, there’s a difference between capital improvements and ordinary expenses: capital expenses are considered assets because they increase the value of your asset (your house), whereas regular expenses are simply costs associated with running your business, they don’t increase their value over time. When it comes time to account for these expenses on paper or tax returns, make sure you know how much each item costs so that when you sell your investment property it will be easier to determine whether those costs were paid by tenants before being deducted from their rent checks or whether they were part of an improvement project paid for by yourself directly as part payment towards owning this particular piece real estate investment property.

Extraordinary Expenses, Income and Losses (EILs)

Extraordinary Expenses, Income, and Losses (EILs) are one-time events that can be either positive or negative. These items are not included in the calculation of net income and they do not affect the value of an investment property. For example, if you had to replace your roof due to damage caused by a storm, this would be considered an extraordinary expense because it was not part of your monthly operating expenses but rather an unexpected cost that must be paid out of pocket. Extraordinary expenses can also come in the form of income when you sell an asset such as real estate or stocks at a price higher than their original purchase price; however, these types of gains are usually taxed so they’re best left alone unless absolutely necessary!

Tax Planning for Investment Properties

Tax planning is a critical part of the investment property accounting process. It’s not as simple as it sounds, however. Tax planning can be different for each person, property, and state/country. Taxes are calculated differently depending on where you live and what type of property you have (commercial vs residential). For example: In New York City, there are two types of real estate taxes: 

  1. General city tax.
  2. Special district taxes (e.g., fire protection).

However, if you own a home outside the city limits then only one type of tax applies, general municipal services such as police protection or schools are not included in this category because they’re provided by other entities like counties or townships respectively rather than cities themselves!


The investment property accounting process is not complicated, but it can be confusing if you don’t know what you are doing. If you have an accountant or financial advisor who has experience in this area, ask them for help with your books. You can use accounting software like Quickbooks to manage your investment properties. You can track income and expenses, as well as create reports that will be useful when it comes time to file your taxes. Using this type of program also allows you to keep track of personal finances if you have other investments or debts outside of the real estate. They will be able to advise on the best way forward so that your records are accurate and up-to-date at all times.

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