As the upcoming tax season approaches, landlords have much to prepare.
If your books are orderly and complete, you can claim dozens of advantageous deductions. Good bookkeeping means keeping careful, thorough records of every expense related to your rental business.
You may also need an accurate log of your work and travel hours. This information is necessary to prove that you qualify to deduct certain expenses, such as meals or business trip costs.
Tracking rental expenses may seem painful, but these deductions could save you hundreds of dollars each year on your taxes. Below are some tips for tracking and documenting your expenses as you prepare for tax season.
Categorizing Rental Expenses
Landlords incur a variety of expenses while running their businesses. From contracting out work to hiring employees and paying taxes, it’s easy to lose track of certain expenses.
However, it’s to your benefit to categorize expenses as you go. By familiarizing yourself with the IRS expense categories, you’ll know how to organize receipts and invoices. Then when it’s time to file your tax return, you’ll already have your expenses sorted.
Here are a few of the common IRS expense/deduction categories.
1. Maintenance (Deductible)
Within the broad category of maintenance, there are many possible expenses. Some are deductible, while others are depreciable.
Repairs and preventative maintenance are two types of deductible expenses. Repairs return something to its original, working condition. Preventative maintenance is routine work done to prevent something from breaking in the future.
Repairs and preventative maintenance are grouped together here because they are both fully tax deductible. By sorting these expenses together, you can list and deduct them all as operating expenses on Schedule E.
2. Maintenance (Depreciable)
Some maintenance work is not deductible but depreciable. These expenses primarily include improvements done to the property, especially to the building structure, its components, or the land around it.
For instance, the cost of installing a new HVAC system is an improvement.
Improvements are depreciated because they add long-term value to your property. This means deducting a percentage of each improvement every year until the cost is fully recovered.
3. Operating Expenses
Most of your rental expenses for the year will be operating expenses. Operating expenses are the normal, ongoing costs of running a rental business.
Two types of operating expenses we’ve already covered include repairs and preventative maintenance costs. Here are some more:
- Tenant screening costs
- Advertising expenses
- Travel and transportation (gas, meals, hotels)
- Home office expenses
- Property management software fees
- Employee compensation
- Casualty losses
- Mortgage interest
- Eviction expenses
- Legal and professional services
- Landlord education (courses or seminars)
As operating expenses, each of these costs is fully deductible.
Keep the invoices or receipts for these expenses and group them together. Come tax season, you can simply copy them all onto Schedule E.
4. Capital Expenses
Capital expenses are long-term assets that contribute value to your business for more than a year.
Capital expenses are not worn out or used up like operating expenses, so their costs can’t be deducted in a single year. Instead, they are depreciated like improvements to reflect their gradual decline in value.
Capital expenses include:
- Cars and vehicles
- Personal property within rentals (furniture, appliances)
- Personal property outside rentals (computers, phones)
- Lawn equipment
- Sidewalks and pavement
- Software subscriptions
Bookkeeping Best Practices
Below are a few best practices for tracking rental expenses.
- Separate your personal and work financials. Keep an independent checking account for your rental income so it’s easy to see incoming and outgoing money.
- Keep scanned copies of all receipts and invoices. These will come in handy not only when you file, but also in case of an audit.
- Separate multiple expenses within invoices. If you hire a contractor who performs multiple jobs, ask for separate invoices. This way, you can categorize each expense appropriately.
Using Accounting and Tax Tools
When it comes to rental expenses, software is your best resource. There are many digital tools available to help you track your expenses for tax season.
For accounting, many landlords use QuickBooks, a general business accounting software platform. Others use the accounting tool built directly into a property management software platform like Innago, AppFolio or Buildium. These tools often have the IRS expense categories built-in for maximum ease and organization.
If you’re looking for tax software, platforms like TurboTax will walk you through the filing process. Enlisting a tax expert is the smartest choice, but know the deductions available in case the person you hire doesn’t.
Rental bookkeeping is not only a way to stay organized and evaluate your profits and losses. If done well, it also secures tax deductions and saves you hundreds of dollars each year. By following these tips and practices, you will be well prepared for next tax season.