Questions and Answers
Which accounting method recognizes income and expenses when they are actually received or paid?
What is one of the primary advantages of using specialized property management accounting software?
Which of the following is a common rule imposed by states on trust accounts?
What does net operating income refer to in property management?
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What is a benefit of preparing an annual operating budget in property management?
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What is the main characteristic of cash-basis accounting?
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Which accounting method requires an owner to obtain approval from the IRS for changes?
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What can property management software generate for financial reporting?
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Which is not a category related to operating expenses?
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What is the purpose of the income and expense statement in property management?
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What is net operating income (NOI)?
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Which of the following can be a method to increase NOI?
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How is return on investment (ROI) calculated?
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What is cash flow?
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Which formula is used to calculate cash flow?
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What does an annual operating budget help to set out?
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What is incremental budgeting based on?
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Which of the following can decrease cash flow?
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What may a property manager do with the NOI?
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Which of the following expenses is not included in the calculation of NOI?
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Study Notes
Financial Aspects of Property Management
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Understanding three main accounting methods:
- Cash-basis accounting records income when received and expenses when paid.
- Accrual-basis accounting records income when due and expenses when incurred.
- Modified cash-basis accounting debits annual expenses monthly while recording income on receipt.
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Property management software generates financial reports for the owner, including budgets, income statements, and expense tracking.
Trust Funds and Bank Accounts
- Trust accounts require careful management and adherence to state regulations on handling trust funds.
- Types of expenses in management include marketing, legal fees, security, and administrative costs.
Net Operating Income (NOI)
- Net Operating Income (NOI) is calculated as Gross Income minus Operating Expenses.
- NOI is key in measuring return on investment (ROI) and property value.
- Strategies to increase NOI:
- Raise rent or occupancy rates.
- Decrease operating expenses, such as utilities or taxes.
Cash Flow
- Cash Flow is the spendable income from a property after all expenses are accounted for.
- Cash flow formula: Cash Flow = NOI - Debt Service.
- After-tax cash flow is calculated post-income taxes on property income.
Preparing the Annual Operating Budget
- An annual operating budget outlines expected income and expenses month-to-month, using methods such as incremental budgeting.
- Budget comparison statements help identify discrepancies for revisions to prevent financial mismanagement.
Income Tax Ramifications
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Key tax deductions available for property owners include:
- Depreciation for wear and tear on property.
- Mortgage interest and points, which are fully deductible.
- Operating expenses, excluding capital expenditures, are generally deductible.
- Operating losses can offset income for qualifying owners.
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Different depreciation periods apply:
- 27.5 years for residential properties.
- 39 years for non-residential properties.
Additional Points
- Income from property management is generally classified as passive income, with specific rules on how passive losses can be deducted.
- Property managers are responsible for keeping proper records and potentially preparing annual income statements for tax purposes.
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Description
This quiz explores the financial considerations involved in property management. Students will learn to differentiate between cash-basis, accrual-basis, and modified cash-basis accounting practices, as well as the benefits of specialized property management accounting software. Additionally, it covers the requirements for trust accounts.
