Rental Property Accounting Tips for Landlords

What Landlords Need to Know About Rental Property Accounting

Most people get into rental property investing for the possibility of semi-passive income and wealth building. Or maybe they do it because of the desire to own something physical and tangible. But the majority of people do not get into real estate investing for the accounting. Yet, it’s one of the most important factors in the equation.

The Importance of Accounting for Rental Property Management

Accounting is basically the process of recording, classifying, organizing, summarizing, and reporting all financial transactions – income and expenses – related to a rental property.

As a landlord or investor, accounting helps you maximize your rental revenue, minimize expenses, and be in a position to optimize your cash flow. Ultimately, it gives you meaningful financial insights to make data-driven decisions about important things like rent rates, new investments, renovations and improvements, and tax withholdings. 

Tips for Rental Property Accounting

As you approach rental property accounting, here are some key tips and principles to keep in mind:

1. Separate Personal and Business Finances

One of the first things you should do when you start renting out property is to separate your personal and business finances. Keeping them together can lead to confusion, making tracking your expenses and profits hard. Open a separate bank account for your rental property income and expenses. You may also consider getting a credit card solely for business-related purchases. This simple step will help keep your finances organized and make tax time a breeze.

2. Track All Expenses

As a landlord, you’re responsible for various expenses, such as maintenance, repairs, and property management fees. It’s easy to lose track of these costs if you don’t have a system in place. Start by keeping receipts for every expense related to your rental property. This can include:

• Repairs and maintenance

• Property management fees

• Advertising costs (for finding tenants)

• Mortgage interest

• Property taxes

• Insurance premiums

• Utilities (if you’re covering them)

Consider using an app or software designed for landlords to organize these expenses. By tracking everything, you’ll have a clear view of how much you’re spending versus how much you’re earning. Plus, it’ll help when it comes time to file your taxes.

3. Use Rental Property Accounting Software

Manual tracking can be time-consuming, and it’s easy to make mistakes. That’s why many landlords turn to rental property accounting software. These tools make it simple to track income, expenses, and even generate reports that give you an overview of your property’s financial health. QuickBooks is probably the most widely used accounting tool out there, but there are real estate focused tools as well (like Stessa).

Better yet, hire a property management company that offers accounting services as part of their package. This is the easiest option, as they’re already very familiar with the day-to-day workings of your property, which makes handling the accounting part pretty seamless.

4. Understand Depreciation

Depreciation is an important accounting concept when it comes to rental properties. Basically, it allows you to deduct a portion of your property’s value each year to account for wear and tear. The IRS lets you depreciate the cost of the building (but not the land) over 27.5 years.

Here’s how it works:

If you bought a rental property for $275,000 and the land is valued at $50,000, the building is worth $225,000. To calculate your annual depreciation, divide the building’s value by 27.5:

$225,000 ÷ 27.5 = $8,181.82

This means you can deduct about $8,181.82 each year from your taxes for depreciation. This is one of the biggest tax advantages of owning rental property, but it can be tricky, so it’s a good idea to consult a tax professional to make sure you’re calculating it correctly.

5. Keep Detailed Records for Taxes

Taxes can be one of the most stressful parts of rental property accounting, but keeping detailed records makes it much easier. Each year, you’ll need to report your rental income and expenses on Schedule E of your tax return. Here are some tips to stay on top of your tax records:

• Keep copies of all lease agreements, receipts, and invoices.

• Save bank statements and credit card statements that show rental-related expenses.

• Record mileage if you travel to your rental property for repairs or other management tasks.

• Hold on to all tax-related documents, including 1099 forms if you hire contractors.

By keeping organized records throughout the year, you’ll avoid the last-minute scramble during tax season.

6. Maximize Deductions

As a landlord, you have the opportunity to deduct many expenses related to your rental property. Taking full advantage of these deductions can save you a lot of money at tax time. 

Some common deductible expenses include mortgage interest, property taxes, insurance premiums, maintenance and repairs, utilities, property management fees, and advertising costs. Make sure to consult with a tax professional to ensure you’re maximizing your deductions and not missing out on any tax-saving opportunities.

7. Budget for Vacancies and Unexpected Expenses

Even though you hope your property is rented year-round, there may be periods of vacancy. It’s important to budget for these times when no rent is coming in. A good rule of thumb is to set aside 10 percent of your rental income each month for vacancies.

Also, expect the unexpected. Major repairs like a roof replacement or plumbing issues can cost thousands of dollars. To avoid being caught off guard, create an emergency fund. Ideally, this fund should cover at least three to six months of your property’s expenses.

Adding it All Up

The basis for rental property accounting is to be organized. But once you get beyond basic financial organization, you’ll start to realize that accounting can be leveraged in strategic ways to increase your cash flow and maximize your profitability. And when you reach this point, many new opportunities will open to you.