Landlords and Tracking Rental Property Expenses: What You Need to Know
April 25, 2023
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All you need to know about Tracking Rental Property Expenses
Every landlord knows that tracking expenses is one of the most burdensome responsibilities when running a rental business.
That said, keeping accurate records is pivotal for your operation.
Anything you can do to simplify your tax returns is a good thing.
And keeping track of rental property expenses helps.
Furthermore, if you’re ever audited, you can rest easier knowing you prepared your taxes properly.
In this article, we’re going to focus on rental property expenses and what you need to know about them related to taxes.
Let’s start with the essential items you need to track:
- Tenant leases (old and new) dating back several years
- Legal documents, rental inspections, court hearings, eviction notices and fines
- Copies of all communications with tenants
- Limited liability corporation records if you decided to incorporate as an LLC
- Property deeds
- Copies of utility bills, receipts for labor and materials and invoices for services that relate to your rental business
- Insurance policies
- Mortgage, loans and credit documentation
- Federal and state tax returns from the last few years
In addition to these documents, you also need to track deductible expenses. These include:
- Proof of rental payments received (automatically recorded if your tenants pay online)
- Legal and accounting fees
- Office expenses, utilities and supplies
- Advertising expenses
- Property maintenance and repairs
If you’re large enough to employ salaried workers, you’ll want to track salaries, withheld taxes, benefits and taxes paid by you.
Rental Property Expenses
Now that we know what to track, we need to look at what exactly constitutes a rental property expense.
Depending on the kind of property you own – single-family rental, multifamily or condo – and the location, rental property expenses fall into one of two categories:
Maintenance, Repairs, and Utilities
- Alarm system
- HOA dues
- Pest control
- Snow removal
General Operating Expenses
- Advertising and marketing
- Car and travel expense
- Dues and subscriptions
- Leasing fees
- Mortgage interest
- Office supplies
- Other interest
- Professional services
- Property insurance
- Property management fees
- Property supplies
- Property taxes
- Rental or sales taxes
- Technology and software
Additionally, real estate investors can also claim a depreciation deduction of up to 27.5 years for a residential rental.
Depreciation is a non-cash deduction rental property owners use to reduce taxable net income. For instance, if you paid $160,000 for a single-family rental (excluding the value of the lot), you could take a depreciation deduction of $5,818.18 ($160,000 / 27.5 years) in addition to the other tax-deductible expenses listed already.
The Internal Revenue Service (IRS) and Rental Expenses
IRS audits have become more common because real estate investors’ income continues to rise. Every landlord wants to save money in tax season; however, it’s important to do so strategically to avoid breaking the law.
There are four major areas the IRS takes special interest in when it comes to rental property expenses. Let’s look at these areas below:
Meals and Entertainment
The first thing you want to do with meals and entertainment is create a policy that you (and anyone you may employ) adhere to. Explain in the policy that your business will only reimburse meals and entertainment if business occurred before, during, or after the meal (or entertainment). Having a policy in place will look better to the IRS if they decide to audit you.
Next, and just as important, always gather documentation. If entertaining and eating are a key part of your rental business, make sure you have sufficient documentation to support those deductions.
Substantial Expenses that are Vague
Another area that IRS agents often take a close look at are big expenses with vague explanations. For example, “credit card expenses,” “general and administrative expenses” or “other expenses” will often prompt close inspection. A key reason the IRS focuses on these deductions is because this is typically where taxpayers write in some questionable items.
Of course, administrative expenses are usually perfectly legitimate. That said, we recommend you break things down and give as much explanation as possible. An example would be instead of showing $6,000 worth of other expenses, it would be wise to break it down as $1,000 for your phone, $500 for online subscriptions, $3,500 in continuing education, etc.
It’s also wise to take an in-depth look at your rental property accounting and bookkeeping systems. If you currently have a substantial balance that all falls into vague accounts, you should break down those expenses now to make things easier when tax time rolls around.
While charitable donations are a good tax write-off, donations that are disproportionate to your income level will grab the IRS’ attention. For instance, if you make around $300,000 annually, the IRS expects you to be able to donate about 3-4% of that amount and nothing more. If you claim a charitable deduction way above this standard, the IRS may show extra interest in your business.
That said, you can donate what you want, but be sure to keep very detailed records to support any claims. This includes receipts, documents, and anything else that will validate your claims.
As a landlord, you can deduct out-of-town travel expenses from your taxes. These expenses include parking fees, gas, meals, lodging, and more. That said, be wary of throwing money around on five-star hotels and expensive steakhouses for every meal. Gratuitous write-offs will probably lead to an audit.
It’s also critical to have proof that your travel is for business. Mixing pleasure and business and then writing off your travel expenses won’t go over well. For example, if your rental is in Miami Beach, but you planned a vacation while checking on your property, you can’t deduct the costs of your hotel, gasoline and meals from your taxes.
Tracking Rental Property Expenses
What’s the best way to track these rental property expenses? While hard copy documents aren’t a bad idea, digital tracking is a great idea.
Property management software like Innago makes it much easier to track your finances, leases, communications and more in a centralized platform. You can pull reports, gather data and get detailed information on rental property expenses.
Property management software helps you automate your process of tracking both expenses and income. This, along with the automatic record-keeping, is an incredible way to save time and money.
Understanding property rental expenses and tracking them properly is tantamount to good business. Your business will only be as successful as your record-keeping and knowledge base.
Thus, it’s vital to track rental property expenses to save money, stay within the confines of the law and enhance your business.