Mark your calendars for the ultimate real estate experiences with Inman’s upcoming events! Dive into the future at Connect Miami, immerse in luxury at Luxury Connect, and converge with industry leaders at Inman Connect Las Vegas. Discover more and join the industry’s best at inman.com/events.
Rental property accounting might be the most difficult part of being a landlord, especially when maintaining properties and orderly finances.
However, there are ways to simplify the process and stay organized throughout the year so that when tax time rolls around, it’s smooth. Here are some accounting tips to help landlords keep track of finances and prepare for tax day.
It’s not personal. It’s business
This may seem like a no-brainer, but you’d be surprised how many small business owners use their bank accounts for business purposes. Opening a separate bank account for your rental property business is vital because it makes tracking income and expenses related to your rental properties easier. Separate accounts also encourage organization and simplify tax preparation.
If you’ve let your recordkeeping slide, now is the time to catch up. You can’t make informed decisions about your properties or business without accurate financial reports. Maintaining accurate records of all income and expenses associated with your rental properties is also the key to streamlining tax preparation. This includes keeping records of rent payments, property maintenance costs, repairs, insurance premiums, property taxes and mortgage payments — preferably all in one place.
When tax season rolls around, it is easier to quickly gather all relevant financial records for the tax year and organize income and expenses by categorizing them. Then, you can determine which expenses are deductible according to tax regulations. Common deductible expenses for landlords may include mortgage interest, property taxes, insurance premiums, maintenance and repair costs, utilities, depreciation and professional fees.
Track, monitor, review, repeat
In the spirit of remaining organized throughout the year and avoiding a frenzy during tax season, there are many accounting data points landlords should be tracking, monitoring and reviewing regularly. It’s a good idea to track all expenses related to your rental properties, including utilities, property management fees and regular maintenance and repairs costs.
Ensure that all rental income is properly documented and accounted for by regularly monitoring and verifying the accuracy of rental income statements. Save receipts and invoices for every expense incurred, and take time to review your financial reports monthly — including profit, loss and cash flow statements. This will help you identify any discrepancies or areas where you can improve your financial management practices.
Take advantage of technology
Using a spreadsheet to track your payments and expenses is one of the oldest methods of record-keeping (besides using pen and paper). Although this is a time-tested way to document data, affordable technologies can automate the process, saving time and increasing the efficiency of your business.
An app or software should require you only to input tenant and rent payment information once, setting up tracking for the tenant’s entire lease. This ensures you’re less likely to find a mistake in your data due to human error and eliminates the time spent manually keying in information. The inputted data can then be easily exported to a .csv file, compatible with Microsoft Excel, Google Sheets and Apple Numbers.
Look for seamless, automated accounting features such as easy setup, property-based reporting, income and expenses tracking, rental transaction templates, fixed asset tracking, document storage, mileage logs and tax-ready reports. Platforms that help you easily and quickly track all of your bookkeeping needs from one app will provide the most convenience.
Get familiar with tax codes and deadlines
Even if you hire an accountant to help with your taxes, as a business owner, you should learn about federal, state and local tax codes, as well as all relevant deadlines. Familiarize yourself with the tax forms and deadlines pertaining to landlords, such as Schedule E (Supplemental Income and Loss) and Form 1040. Note the due dates for filing taxes and any extensions.
Understanding tax laws and regulations — and keeping up with changes to the tax code every year — will help you inform you on how to handle accounting and drive better financial decision-making throughout the year. Pay special attention to those laws and regulations that apply to landlords and small business owners to take advantage of all available deductions and credits.
Maximize deductions and credits
It’s important to determine which expenses count as deductible expenses for landlords. These may include mortgage interest, property taxes, insurance premiums, maintenance and repair costs, utilities, depreciation and professional fees. If applicable, calculate and record the depreciation for your rental property, which allows you to deduct the cost of the property over its useful life, reducing your taxable income.
You should also document all home office expenses because if you use a portion of your home exclusively for rental property management activities, you may be eligible to deduct a percentage of your dwelling’s expenses (such as utilities, insurance and maintenance). Just be sure to keep detailed records to support your claims in the event of an audit.
Take care in differentiating between deductible repairs and capital improvements. While regular maintenance are typically deductible in the year they are incurred, capital improvements, such as installing a pool or making energy-efficient upgrades, may need to be depreciated over time.
Consult a tax professional
Finally, if you’re unsure about any aspect of your rental property accounting and tax obligations or need help with tax preparation, seek advice from qualified accounting professionals specializing in real estate taxation. Even if you prefer to handle your accounting and prepare your own taxes, it’s always a good idea to consult a tax professional to properly classify expenses and deductions and ensure you abide by all applicable laws and regulations. They can also provide valuable guidance tailored to your specific situation.
Ryan Barone is the co-founder and CEO of RentRedi, an award-winning rental management software that transforms the way landlords and tenants manage their renting experience.
