Knowing how to track rental income and expenses is crucial to staying out of trouble with the IRS. No landlord wants an audit, so getting organized early in your tenure as a rental entrepreneur is particularly important if you’re planning to scale your business. Having an effective system to track rental property income and expenses helps with the following:
- Filing taxes each year
- An IRS audit
- Ensuring you submit the right amount of deductions
- Understanding the actual value and return on your investments
This blog will provide 10 tips for tracking money in and out of your rental property investments.
What You Need to Know About the IRS and Tracking Rental Property Expenses
The first thing to know about the IRS rules for tracking rental property expenses is that you report and deduct rental expenses and income from properties as you receive it. The IRS says the security deposits that ensure the final rent payment are also considered income and must be reported the year you receive them.
Another requirement is related to services that you receive in place of rent. For example, if your tenant is a landscaper and provides groundskeeping services, you must track the value of the services rendered against the rent due. There are even IRS rules related to tenants paying expenses. Say you own and rent a single-family home, and the tenant pays the sewage and water bill for the property instead of rent twice a year when payment is due to the city. You must carefully track this.
Note that these record-keeping rules for how to track rental income and expenses don’t even cover the complexities of the deductions you may take from the IRS. As you add properties to your portfolio, the level of complexity increases.
For obvious reasons, you need an efficient tracking system that can easily scale as your business grows.
Tips for How Can You Track Rental Property Income, and Expenses
#1: Go Digital
Moving to a digital-first mindset makes for more efficient record-keeping. Having a hard copy of documents makes for a messy tax season. You should have an online system to collect rent digitally, communicate with tenants, and even record repair requests. This activity should culminate in an efficient digital tracking of rental income and expenses.
#2: Go Mobile
Consider a smartphone app when looking at digital tools to track rental property expenses. The benefit of a phone app is that it can allow you to track rental income and expenses while you are out in the field. Suppose you only have a handful of properties and handle all the myriad tasks associated with being a landlord yourself. In that case, you probably could benefit from a financial tool that travels with you on your smartphone.
#3: Track Rental Expenses
You must also track deductible expenses for your tax returns to maximize your business. Are you following the times you fill up your gas tank while servicing properties? Some typical expenses to track include:
- Alarm system maintenance fees
- Cleaning costs
- Office supplies
- Pest control
- Property insurance
- Snow removal
- Subscription services
An excellent electronic app should allow you to take all of these paper expenses and upload them to the cloud. Look for software tools that even let you run reports for your accountant instead of carrying miscellaneous receipts in a shoebox.
#4: Don’t Forget the Depreciation Deduction
The IRS has averaged the value of rental properties, quantifying the productive lifespan of your investment as 27.5 years. Each year, the property loses value. Depreciation allows you to deduct a portion of the property over that timeframe. The depreciation formula is:
Actual property value $200,000
divided by 27.5 years divided by 27.5
Depreciation expense $7,273 annual depreciation expense
This rule currently allows you to deduct depreciation from your taxes each year.
#5: Track Travel
Did you know you can deduct all your driving for your rental property? Some of the typical scenarios that can turn into positive cash flow in the form of a write-off include:
- Dealing with a tenant issue
- Delivering supplies
- Overnight stays or travel and expenses
- Picking up the rent
- Purchasing a part for a rental repair
- Vehicle-related expenses such as gas, repairs, and upkeep (you can also use the IRS standard mileage rate)
#6: Monitor Pay to Independent Contractors or Employees
At some point, even the most independent landlord may decide they need help. You must know how to track any hired activity as a rental property expense, including repair contractors as well as employees. The fees or salaries should be tracked on your rental property expenses and income sheet.
#7: Are You Tracking Pass-Throughs?
Another great tip for how to track rental property expenses is the pass-through deduction. You can write off the cost of any personal property used in a rental property. For example, say you use a power washer from home to clean the siding on your rental. Or perhaps, you hand-clean the property between tenants and use your home vacuum to get the job done. Talk to your accountant to ensure you track the right amount by the personal property item.
#8: Set Recurring Payments
The best property management apps connect a tenant’s bank account with your own. Automatic rent payments ensure you get paid on time and improve cash flow. These applications can even automate paying your bills (not just the tenant’s). This is a highly efficient way to leverage the latest technologies to pay and track rental income and expenses.
#9: Track Professional or Legal Services
Did you hire a lawyer to help close the property or set up your business? Are you thinking about a property management company to help you scale? If you worked with a real estate professional or even a financial advisor, these professional services could all equal a payout at tax time for the savvy landlord who properly keeps track of rental income and expenses.
#10: Hire a Property Management Company
Speaking of property management companies, if you’re wondering how to track rental property expenses, why not hire Tenant Planet and let us worry about all of this? Our services include a fully digital portal that is mobile-friendly. You can track rental income and expenses from one smart hub, keeping your growing business organized, legal, and profitable.
Tenant Planet is a leading tenant and property management company with the best tools to track rental income and expenses. Find out how we can streamline your business so you can focus on building it.
· Improves tax filing
· Streamlines an IRS audit
· Ensures you submit the right tax deductions
· Helps you understand the true value and return on your investments
· Alarm system fees
· Office supplies
· Pest control
· Property insurance
· Property repairs
· Snow removal
Each year, your property loses value. Depreciation allows you to deduct part of the property costs. The depreciation formula is:
Actual property value / (divided by 27.5 years) = Depreciation expense