Rental Tracking: A Landlord's Guide to Expense Reporting
Do you ever feel like a 1950s accountant buried under a mountain of hand-written receipts and ledger books tracking your rental property finances? Those days are over.
As a landlord in this day and age, you can leverage technology to simplify record-keeping, maximize tax deductions, and ultimately boost profits.
If you're struggling to categorize that shoebox full of wrinkled receipts or dreading the next tax season, the right rental property tracking system will make accounting painless.
Going paperless and using smart, modern tools means no more tax season headaches. Instead of just surviving as a landlord, let technology help you truly thrive by unlocking a new level of rental profitability.
Records to keep when tracking expenses
As a rental property owner, keeping your financial house in order through detailed record-keeping provides the foundation for success.
What should you actually be tracking? Here are the essentials for your filing cabinet.
- Bank statements: Track bank statements from the property-operating account to showcase the proper separation of personal and business finances.
- Expense receipts: Copies of expense receipts like utility bills, material and labor costs, supplies, and other property-related expenses.
- Tax returns: Copies of federal, state, and local tax returns from previous years. Consult your accountant or CPA for the best practices applicable to your business.
- Property purchase documents: Documents pertaining to the property purchase, including settlement statements, escrow reports, and inspection records.
- Rental payment evidence: Evidence of rental payments received, including dates and amounts.
- Marketing expenses: Expenses incurred during the marketing of vacant properties, such as online advertising fees, lease preparation costs, and tenant screening reports.
- Service provider invoices: Invoices from professional service providers like leasing agents, property managers, lawyers, and accountants.
- Leases and applications: Leases for current and previous tenants, along with applications and tenant screening reports.
- Mortgage documents: Mortgage loan documents and detailed payment history, including principal, interest, taxes, and insurance breakdown.
- Tax records: Records of sales or tax on rentals paid to local authorities for each property and tenant.
- Tenant paperwork: Tenant-related paperwork such as commissions, maintenance requests, repairs, and late rent notices.
- Travel expenses: If you travel for property-related activities such as tenant visits, supply deliveries, or repairs, track your travel expenses. Gas, vehicle repairs, accommodations, and meals should all be recorded.
Tracking rental property expenses
Getting your arms around rental property income and expense records is key for real estate investing success, but it's easy to feel overwhelmed by the tracking process. Between organizing expenses and exploring tax deductions, it can quickly become complex. Having the right frameworks in place makes all the difference.
Here are some tips you can use to track rental property expenses:
Create a system for categorizing your rental property expenses. It helps organize financial data, simplifies analysis, and confirms accurate reporting. Common expense categories for IRS Schedule E (Form 1040) include:
- Auto and travel
- Cleaning and maintenance
- HOA fees
- Late fees
- Legal and professional fees
- Management fees
- Office expenses
- Rent payments
Transitioning to digital
Transitioning to digital systems can simplify managing rental finances. Online solutions allow you to collect rent payments digitally, track expenses, and generate custom reports.
Azibo's end-to-end rental property management software includes robust tools for tracking income and expenses. Key features relevant to financial oversight include:
- Digital rent collection: Accept online payments from tenants via credit card, debit card, or ACH. Streamline payment collection through automation.
- Financial management: Automatically categorize income and expenses. Generate custom reports for cash flow, profits, and other metrics to simplify analysis. Integrate with popular accounting software.
- Real-time accounting: Maintain up-to-date financial records across your portfolio. Scan receipts, track mileage, and more to simplify tax preparation when filing returns.
Set up recurring payments
Streamline rental property expense tracking by setting up recurring payments for regular expenses like utilities, property management fees, subscriptions, or mortgage instalments.
Automation saves time over manual payment and offers reliable record-keeping with payment confirmation tracking. Schedule recurring charges to align with days after rent collection for steady cash flow management.
Consider linking bank accounts and credit cards to tools offered within rental property software platforms. Automate transfers after digital rent collection.
Discovering avenues for tax deductions in rental property management can be a game-changer for landlords. From leveraging depreciation on various property elements to understanding pass-through deductions, navigating these strategies with the guidance of a tax professional can significantly impact your taxable rental income.
Don't overlook depreciation
Take advantage of the IRS rules regarding depreciation deductions. Each year, your rental property depreciates in value, and you can deduct a part of the property's value over its useful life. Deductible assets include:
- The rental property itself: You can depreciate residential properties over 27.5 years.
- Improvements: Upgrades like new flooring or HVAC systems.
- Equipment: Any equipment used for the rental can be deducted over 5-7 years.
Properly tracking these types of depreciable assets and related expenses can significantly reduce your taxable rental income.
Managing rental properties can be involved and complex. Consider hiring a property management company to alleviate the burden of tracking income and expenses.
These companies have robust systems in place to handle financial management efficiently, providing you with accurate reports and peace of mind.
Pass-through deductions allow landlords to claim expenses for personal assets utilized for rental property operations rather than only deducting direct rental costs.
If you regularly use certain tools, equipment, vehicles, or supplies from your primary residence for managing your rental property, you may qualify to deduct a portion of these assets’ values each tax year.
Consult with a tax professional to understand how you can deduct the value of personal property used in your rental activities.
Reporting rental income and expenses
As rental property owners, we've all faced that anxious moment come tax season when we stare at all of our accounting documents, wondering, "How do I make sense of this for the IRS?" Properly documenting finances isn't just a best practice — it directly impacts your tax bill.
Reporting correctly leads to maximized deductions. The key lies in knowing what legally constitutes income versus allowable expenses. Understand the guidelines around these key areas:
Defining rental income
The IRS categorizes rental income broadly. In addition to normal rent payments, it includes associated fees, services provided by tenants instead of rent, security deposits kept for damages after move-out, and any expenses paid directly by tenants. Refundable security deposits don’t count unless you retain a portion.
It's important to note that if your rental expenses exceed your rental income, there may be limitations on the amount of loss you can claim, particularly under at-risk rules and passive activity loss rules.
Most ordinary and necessary costs for operating the rental can be deducted. This includes mortgage interest, property taxes, supplies, repairs, maintenance, advertising, management fees, and operating expenses.
Be aware that you can't expense major upgrades and improvements when incurred; instead, you'll depreciate those items over several years.
Reporting on tax returns
Use Form 1040 Schedule E, Part I to report total rental income, expenses, and depreciation for each individual property. Attach extra pages when exceeding three rentals.
Calculate depreciation using Form 4562 and transfer the figure to Schedule E.
Mastering rental tracking
As a rental owner, financial clarity should bring empowerment, not extra work. Following sound income and expense tracking practices helps you file taxes accurately and claim earned deductions. Beyond ensuring IRS compliance, visibility into your property finances facilitates smarter decisions that can increase profitability.
While there is effort involved to track rental expenses accurately, all-in-one property management platforms reduce the heavy lifting. Automation handles the categorizing, reporting, and compliance so you can focus on big-picture strategy.
Rental tracking FAQs
How often should I reconcile my rental property expenses?
Reconcile rental property expenses on a regular basis, such as monthly or quarterly. This involves comparing your recorded expenses with a credit card and bank statements to assure accuracy and identify any discrepancies.
Regular reconciliation helps catch errors or missing expenses early on and confirm your financial records are up-to-date.
What is the rule of thumb for rental property expenses?
The 50% rule is a common guideline for rental property expenses, suggesting that about half of the rental income will go towards various expenses, including maintenance, property management fees, taxes, insurance, and mortgage interest. The other half is then available for profit or to cover the mortgage principal.
However, actual expenses can vary based on factors like location and property condition, so landlords should analyze their specific costs for a more accurate estimate.
What is a spreadsheet for keeping track of rent?
A rent tracking spreadsheet is a tool for managing rental payments, detailing tenant names, property addresses, monthly rent amounts, payment dates, and any outstanding balances. Alternatively, you could use an online platform like Azibo to automate this process for more efficient financial oversight.