Why should you have Separate Bank Accounts for your Rental Business
Was that a personal or business expense?
This and questions like it are ones you want to avoid when tax time rolls around.
As a landlord, it’s critical to keep your personal finances and business finances separate.
It makes your life easier.
Separate bank accounts for your rental properties make it simple to claim all relevant expenses and reduce your tax burden.
And who doesn’t want to add simplicity to their life while saving money?
Let’s look at the top ten reasons you should open separate bank accounts for your rental properties.
#1: Prevent commingling of funds
Let’s start with the most obvious reason: You don’t want confusion between your personal finances and business finances. Furthermore, there are a lot of states that have laws preventing commingling security deposits with other assets. This rule is typically in place to protect renters because the security deposit belongs to them (except in the case of lease violations).
Regardless of the law, though, it’s always best to avoid commingling these funds. Using a separate bank account for your rental property helps you organize your finances better and makes tax time substantially simpler.
#2: Prepare to Scale Your Business
The importance of separate accounts becomes more pronounced if you start scaling your portfolio. If you add new rentals or extend your business in other ways (I.e., short-term rentals), you’re going to have more moving parts and financial records to track. More transactions mean organization is even more critical.
The main way separate bank accounts help you scale your business is by providing a clear picture of financial performance for your properties. Separate accounts allow you to easily track the profitability of each property and make informed decisions based on good data. You can use this data to make strategic decisions about expanding your portfolio by investing in properties that will generate higher returns.
Separate bank accounts help you build stronger relationships with lenders and investors. With separate accounts, you can provide accurate financial statements and show that your rental business is its own legal entity. Lenders and investors will have more confidence in the legitimacy and financial health of your business if you own a legitimate business that can provide numbers and data.
#3: Protect Personal Assets
Separate bank accounts help you safeguard your personal assts; there aren’t special protections for commingled accounts.
For instance, suppose you are involved in a legal case and your bank account is frozen. If that account has both personal and business finances in it, you won’t be able to access your personal funds because it’s likely that all the money will be considered part of your business account.
Or suppose a tenant sues you for injuries sustained on your property, your personal assets may be at risk if the rental business is found to be liable for the damages.
By having separate bank accounts, you protect your personal assets from legal claims like these. The assets in your business account will be at risk, but your personal assets will be safe.
Furthermore, separate bank accounts show a court that your rental business is a separate legal entity from your personal finances. This matters in case of any disputes with tenants or contractors, as it can help prove that you’re operating your business in a professional and responsible manner.
In some cases, having separate bank accounts even helps you secure insurance coverage for rental properties. This is because some insurance providers require landlords to maintain separate business accounts to qualify for coverage.
#4: Simplify Accounting
Any way you can make rental property accounting easier as a landlord is a win. If you have a bank account with personal and business funds, then you’re going to have to go through entire statements to figure out which transactions are personal, and which are business. If that sounds like a nightmare it’s because it is.
Separate accounts make it easy for you to keep track of rental income and rental property expenses and create detailed financial reports. This allows you to see which properties are most profitable and which ones are struggling. Then, you can use this information to decide whether to invest in improvements, sell your property or do something else.
Additionally, having separate bank accounts makes it easier for to prepare financial statements and tax returns. You can provide accurate financial information to their accountant or tax preparer, and easily track tax deductible expenses.
Do yourself a favor and open separate accounts. You’ll save valuable time and effort because a business account will only have business transactions on it. There are many property software management platforms that can make this process even easier, too. You can do a lot of your reporting and accounting within the software and link it to bank accounts.
#5: Simplify Taxes
If you want tax-ready financials, then separate bank accounts is the way to go. You lessen your tax preparation fees by having a bank account devoted to your business. You also make it easier to claim all relevant expenses and lower your tax burden.
#6: Keep Detailed Records
In addition to simplifying certain things, having separate bank accounts for personal and business funds also allows you to keep accurate and detailed records of their rental property transactions. This is particularly crucial when it comes to tracking rent payments, expenses, and other financial transactions related to your business.
You can easily identify which transactions are related to your rental business and which ones are personal. This can be quite useful if disputes with tenants or contractors arise, or in the case of an audit by the Internal Revenue Service.
#7: Enhance Professionalism
You want to approach your business like a business. This isn’t a hobby, so your business deserves separate finances. Dedicated bank accounts for your properties create a more credible image for tenants and investors. This helps you build trust and shows that you’re serious about your rental business.
Conclusion
As shown in this article, there are numerous benefits to having separate accounts for your rental business and your personal finances.
If you want to simplify your business, save money, save time and improve your business, opening separate accounts is a good idea.
