Are you making the #1 mistake short-term rental (STR) owners often make? It’s an easy one to fall into, especially when you’re eager to get your property up and running. It’s a mistake that seems small at first but can snowball into major problems.
The mistake? Commingling your finances – mixing personal and business funds.
It’s one of the most common errors I see, and it can lead to tax headaches, disorganized finances, and even legal risk. The good news? Fixing it is simple if you act now.
But first, let me tell you about Mike, a first-time rental owner who was guilty of the #1 mistake STR owners make. He was excited to purchase his first property, a charming beachside condo in Destin, FL. In his eagerness to get started, Mike skipped setting up a separate bank account and credit card for his rental business.
At first, it didn’t seem like a big deal. He used his personal credit card for furniture and supplies and deposited rental income into his personal checking account. But come tax season, Mike’s finances were a nightmare. He had receipts scattered everywhere (email, paper, or just lost) and couldn’t remember when looking back at his transactions which were personal purchases and which were business expenses.
Mike’s stress skyrocketed, but there is a solution. He reached out to me for help with setting up his accounts the right way, cleaning up his bookkeeping, and putting an end to the commingling.
Mike’s story is all too common, but it doesn’t have to be yours. By taking a few simple steps to separate your business and personal finances, you can save yourself so much time, money, and unnecessary stress.
What Is Commingling?
Commingling occurs when you mix your personal and business finances, such as using the same bank account or credit card for both personal and STR expenses. For example, you might buy supplies for your rental property or pay for renovations with your personal credit card.
This unfortunately is the #1 mistake I see STR owners making and I understand why, I’ve even done it too. When you have your first rental property you’re just frantically trying to get everything set up and ready to rent and aren’t necessarily thinking about the finances.
But while this might seem harmless at first, it can create significant problems down the line, especially come tax time.
Why Does Commingling Matter?
If you’re commingling finances in your STR, then there are several key risks that you’re taking with your business:
- Tax Complications
When it’s time to file your taxes, separating your personal and business expenses becomes a nightmare. I can’t even tell you how many people have come to me stressed and overwhelmed for this very reason asking for help with trying to fix the commingled mess their finances have become. Because of this, you could:- Miss out on thousands of dollars of tax deductions because you can’t clearly identify and defend business-related expenses.
- Face a potential IRS audit due to unclear or inconsistent financial records.
- Messy Bookkeeping
Accurate financial statements are crucial for tracking your short term rental’s profitability. When finances are mixed, it’s nearly impossible to maintain organized bookkeeping. You’ll waste time sorting through transactions and risk misreporting your income or expenses. - Legal Risks
If your short term rental is under and LLC, commingling finances can void your legal protections. Should you face a lawsuit, the court might decide that your LLC isn’t truly separate from you, allowing them to go after your personal assets – a concept know as “piecing the corporate veil.” If they can go after your personal assets we are talking about things like your personal home you live in and all your personal checking accounts or investment accounts. Trust me… this is not a situation you want to be in.
How to Stop Commingling Your Short Term Rental Finances
The solution is straightforward: set up separate financial accounts for your short-term rental business. Here’s how:
- Open a Separate Business Bank Account
- Choose a business checking account specifically for your STR income and expenses.
- Ensure all rental income is deposited directly into this account.
- Get a Business Credit Card
- Use this business credit card exclusively for rental property purchases and expenses, such as furniture, supplies, maintenance, and repairs.
- This keeps your personal and business expenses completely separate.
- Use the Credit Card For All Expenses
- Whenever, possible, charge all STR-related expenses to the business credit card. This creates a clear transaction history and simplifies bookkeeping.
- Automate Your Income Deposits
- Set up your rental platform (Airbnb, Vrbo, etc.) to deposit earnings directly into your business bank account. This ensures all income flows into the right place from the start.
The Benefits of Separating Your STR Finances
Once you’ve separated your personal and STR finances, you’ll now get to enjoy the following advantages:
- Better Organization: You’ll easily track income and expense, saving hours on bookkeeping.
- Simplified Tax Filing: Clearly categorized expenses ensure you don’t miss deductions.
- Enhanced Legal Protection: If your STR is under and LLC, separate finances help preserve your liability shield.
- Accurate Financial Insights: You’ll have clear reports to assess your STR’s profitability and plan for growth.
FAQs About Separating STR Finances
Q. What if I have multiple properties?
A: Each property should be treated as its own business. That means you’ll want to set up a separate business bank account and business credit card for each property. Keeping the finances of each property distinct allows you to accurately track income, expense, and profitability for each one. This is especially important for tax purposes and long-term financial planning.
Q: Does this apply to mid-term and long-term rentals as well?
A: Absolutely. The same principles apply whether you’re managing short-term, mid-term, or long-term rentals. Keeping your finances separate for each property ensures you stay organized, maximize tax deductions, and maintain legal protections regardless of the rental duration.
Q: What happens if I’ve already been commingling my finances?
A: Don’t worry. It’s never too late to fix it!
Start by:
– Opening separate bank and credit card accounts for your STR business.
– Reviewing past transactions to categorize expenses correctly in your bookkeeping.
– Consulting a financial professional to help clean up and organize your records moving forward.
Q: Do I need to create an LLC to separate my finances?
A: While creating an LLC can offer liability protection, you don’t need one to separate your finances. Whether you’re operating as a sole proprietor or under and LLC< separating your STR’s income and expenses from your personal finances is essential.
Q: Should I use software to track the finances for my STR?
A: Yes! Yes! Absolutely Yes! Using accounting software like QuickBooks Online can make managing your rental finances SO MUCH easier. It allows you to:
– Track income and expenses
– Categorize transactions
– Generate financial reports
– Simplify tax preparation
My QuickBooks Setup Course for STR Owners is designed to help you set up your accounting software efficiently and maximize its benefits for your rental business.
Final Thoughts
If you’ve been guilty of commingling the finances in your short-term rental business, now is the time to fix it. Protect yourself from the #1 mistake I see STR owners are making by setting up separate bank and credit card accounts, you’ll protect yourself legally, simplify tax season and ensure your business runs smoothly.
Ready to take control of your rental finances? Check out my QuickBooks Setup Course for STR Owners for more tips on streamlining your financial systems and maximizing your deductions.