9 Financial Record-keeping Tips for Landlords
Record-keeping is a key part of being a successful landlord.
Taxes shouldn’t require a last-minute panic to find everything you need.
Instead, you should prepare for them throughout the year.
Exceptional record-keeping will save you valuable time and effort when tax season inevitably rolls around.
So, with that in mind, here are ten tips on how to keep rental property records and breeze through tax season.
1. Use Property Management Software or Technology
In the past, bookkeeping for landlords relied on physical copies and paper. Nowadays, it’s unwise to eschew technology. Property management software can make a massive difference for your business. It’s built with you in mind. So why not take full advantage?
Property management software automates accounting and bookkeeping tasks, helping you avoid accounting errors. And, as anyone who’s made a mistake knows, unintentional mistakes can add up to costly consequences.
Property management software also reduces time spent on day-to-day rental property accounting tasks. These platforms record every transaction automatically and help keep you organized.
2. Keep Paper Records for the Past Seven Years, too
Embracing technology doesn’t mean leaving paper behind, though. The IRS recommends that every small business keep journals and ledgers, year-end financial statements, tax returns and supporting documents dating back seven years.
It’s important to store these physical copies just in case. A back-up plan is useful to insulate yourself if technology fails in some severe, unexpected way.
3. Get Everything in Writing
We know you hear what we’re about to say all the time, but it bears repeating. Leases are legally enforceable, formal documents, but you need to make sure they’re signed and saved in a secure place. Any other agreement or stipulation with tenants should get the same treatment.
Retain copies of rental payments and communications with tenants as well. These kinds of records are vital if you ever end up in court or go through an audit. You want as much proof as possible.
4. Cash Versus Accrual Method
When it comes to accounting, you have two choices regarding how you approach your finances: Cash or accrual accounting. The cash method records revenue and expenses when the cash for those transactions is received or dispensed. As an example, let’s say your tenant sends you $1,000 for February’s rent payment due on February 1st on February 2nd. The record for this transaction is February 2nd because that’s when the cash changed hands.
The accrual method, on the other hand, records revenue and expenses when transactions occur before the money is received or dispensed. So, in the same example above, the record for that transaction is February 1st because that is the day rent is due.
The cash basis method is more common for small businesses and sole proprietors because it’s easy to maintain and understand.
The accrual method is more common for large businesses, especially publicly traded companies, because it levels out earnings over time.
Both methods have pros and cons, so be sure to do your research to decide which is best for your business.
5. Keep an Itemized Record of All Income
The IRS requires a disclosure of all income from rental properties. Furthermore, if you have other services like a laundromat, you must declare that too.
Regarding rent, a common way to keep track of this income is to maintain a rent roll. A rent roll is a snapshot of overall expected income and historic income. A rent roll tracks rent payments that are due, lease terms and late fees.
A rent roll obtains data from each tenant’s lease and places it in one centralized document. This makes it easy to figure out who’s paying on time and where your income is coming from.
6. Maintain Records of All Expenses
Maximizing deductions is a key part of your success as a landlord. Document every expense and make sure you understand the different deductions.
If you undergo an audit, you must show all your expenses related to rental activities. If you cannot support items reported on your tax return with evidence, you may incur penalties and additional taxes.
The IRS makes it clear that you must be able to substantiate certain elements of expenses to deduct them. Documentation like receipts, canceled checks or bills are critical as evidence.
7. Use 1099s and W-9s Wisely
If you hire independent contractors to work on your rental properties, you must understand these forms and how to use them properly.
A 1099 form reports a non-employee’s income from your rental business for any given year. Independent contractors and others need this form to file to report income they made working for you. That said, you don’t need to file a 1099 unless a non-employee made over $600 in one year.
When it comes to W-9s, every employee should complete one as soon as they start working. A W-9 is a form that requires a taxpayer’s identification number and lets your tax professional know the kind of business (I.e., partnership, sole proprietorship, etc.) and if they need to file a 1099.
8. Set up Separate Bank Accounts for Each Property
If you only have one account for all your properties, it’s hard to track each property’s expenses and income. When you open separate bank accounts for each rental property, it makes tracking exponentially easier. And, just as important, you’ll be well-organized when tax time rolls around.
9. Maintain a Reliable Tracking System
While it’s crucial to have a separate banking account for each of your rental properties, it’s also important to set up a reliable system for tracking expenses and income for every property you manage.
You don’t need to reinvent the wheel, though. There are a lot of options on the market when it comes to accounting software for landlords.
QuickBooks, for instance, is a popular accounting software you can customize to fit your needs. Quicken also developed software designed for rental property owners that’s called Rental Property Manager. Many property management software platforms like Innago also have accounting capabilities that can help you manage your rental finances.
Conclusion
Financial record-keeping is critical for every landlord. You need to be ready for tax season. The better prepared you are, the smoother things will go.
By following these nine tips, you have a great foundation for effective record-keeping.
