Every real estate investor is good at keeping track of the rent received each month, but some end up dropping the ball when it comes to keeping track of expenses.
Ensuring you have accurate books for your rental properties is critical to setting you up for success and ensuring you are able to take advantage of all deductions that you are entitled to.
There are several reasons why real estate investors should accurately keep track of the records for a rental property.
In addition to knowing if you are making a profit, accurate records will also help you report the correct amount of taxable net income. Secondly, by having an itemized list of the money coming in and going out, you can strategize on ways to increase your income and reduce your operating expenses.
Categories of Records
Records for a rental property fall into one of two categories:
- An itemized list or report of the income and expenses.
- Backup or supporting documents to prove the income and expenses are true and correct.
Types of Records to Keep
There are a variety of receipts and records to keep when you own a rental property:
- Tenant leases for the current and past tenants, going back several years.
- Legal documents and expense records relating to the leases, such as leasing commissions paid or court fees for an eviction.
- Proof of rental payments received, which are automatically recorded when your tenants pay rent online.
- Bank statements from the account specifically set up for your rental property to track the flow of cash, and to prove that you aren’t commingling business and personal funds.
- Copies of utility bills, receipts for materials and labor, and invoices for supplies and other services that directly relate to the rental property.
- Professional service fee statements from lawyers, accountants, and property managers.
- Advertising and marketing costs connected with filling a vacant property, including online tenant screening and lease preparation.
- Mortgage documents and records of loan payments made.
- Property tax and rental tax statements if your city assesses a sales or use tax for the monthly rent collected.
- Copies of your federal and state tax returns going back several years.
Most small rental property investors aren’t large enough to have salaried employees. If you are, you’ll need to keep track of salaries, benefits, employee taxes withheld, and taxes paid by the employer.
How to Track Rental Property Expenses
There are a lot of pieces of paper to keep track of to accurately report your rental property expenses. If you’re just beginning to build your rental property portfolio and only own one or two rental homes, you may decide that a simple spreadsheet is sufficient.
Personal and Business Accounting Software
Some of the best business accounting software programs are QuickBooks Online, Xero, FreshBooks, and Wave. Before investing in one of these programs, download a free trial version if possible, to make sure that the service is cost-effective and right for your needs. However, if you only have 1 or 2 properties that you may only need something as Microsoft Excel.
Now that you are likely thoroughly confused, the key, like in real estate investing is just to start. Your system may not be perfect but it’s likely better than a shoebox full of receipts.
If you’re looking for a recommendation for an accounting or tax professional to help you with this, feel free to reach out and we’d be happy to recommend one of our preferred vendors.