I’d add at least a sentence or two here just to introduce the topic a bit
Owning a business comes with a host of responsibilities, and one those responsibilities is tracking your expenses. In order to remain profitable and make the most of your income, it’s important to keep account of what is coming out of your account and what it’s going towards. Below are some ways to track your rental property expenses.
What is a Rental Property Operating Expense?
Property expenses fall into the category of either maintenance, repairs and utilities, or general operating expenses depending on what kind of property you own (single- or multi-family rental or condo) and the location.
Maintenance, repairs and utilities include the following and more:
- Cleaning
- HOA dues
- Trash
- Water
- Electric
- Gas
- Landscaping
If your expense does not seem like it would fit in any of the above categories, it’s probably a general operating expense. General operating expenses include:
- Advertising and marketing
- Phone
- Professional services
- Technology
- Rental or sales taxes
- Leasing Fees
- Mortgage and other interest
Essential Documents
It’s important to have your documents prepared just in case you’re ever audited by the IRS. With so much data to keep track of, it can be hard to know exactly what documents you need to have on hand.
It’s a good idea to have tenant leases both from your current tenants, and from tenants going back a few years. Keep all legal documents and copies of any communication that you may have with tenants. You’ll also want to hold onto property deeds, utility bills, insurance policies, and federal and state tax returns.
Tracking Deductible Expenses
Tracking deductible expenses is a great way to maximize your profit as a landlord and make the most out of tax season. Whether you’re filing your taxes yourself or sending them off to a professional, you’ll need the above documents to be able to prove to the IRS that the rental property expenses you’re deducting are for business.
Keep proof of all rental payments received as well as any legal and accounting fees you pay for. Also, keep receipts for office expenses, property maintenance, advertising expenses, and repairs.
The IRS and Rental Expenses
Real estate has proven to be a lucrative investment, and the number of people participating has skyrocketed in recent years. With this boom of new landlords has come more scrutiny from the IRS (the Internal Revenue Service). Now, there are more people that want to cut corners and save some money by ignoring certain tax laws and regulations. It’s great to save money through legal deductions, but it’s important that you stay within the law.
Sometimes, the IRS can take special interest in your finances even when you think you’re doing everything right. There are four main areas that the IRS will investigate when tracking rental property expenses.
Charitable Donations
Being able to give some of your money to charity is a great thing, and the IRS knows that. There will not be any penalties for donating your hard-earned cash unless it is deemed suspicious.
The IRS expects you to be able to donate around 3-4% of your annual income. Anything more than that amount seems excessive and could raise some red flags. If you do plan on donating more than 3-4%, make sure you keep detailed records and receipts proving that the money actually went to a charity.
Large, Vague Expenses
Some taxpayers use vague terms when writing off their expenses to be able to fit questionable items within those categories. For example, writing in $6k for “credit card expenses” or “other expenses” would look suspicious to the government. In order to avoid this, try to break down those large expenses into smaller, more descriptive portions.
This process is made easier when using property management software. It’s easier to see at-a-glance where your large expenses are, so you can catch them and break them down before tax season comes around.
Meals and Entertainment
The best way to manage your meal and entertainment expenses is to communicate with your team and figure out a realistic policy regarding what you can count as a business expense while eating out and what you cannot. A good rule of thumb is that any meal or entertainment before, during, or after a business event can be reimbursed. Not only will you and your team be on the same page regarding this issue, but it also looks better to the IRS to have a set policy if they do decide to audit you.
Also, as always, keep good records and receipts so you can have proof if needed.
Travel Expenses
It’s a luxury to be able to write off your business out-of-town travel expenses. However, the IRS will be interested if you are consistently staying at the nicest hotels or taking first class flights to your destination. Keep your travel arrangements realistic, and make sure you keep your receipts. Also, make sure that the trips you write off are for business, not your family’s annual Punta Cana trip.
Conclusion
Property management software makes accounting and tracking expenses much easier than figuring it out manually. Humans make mistakes, and by automating your bookkeeping system, you’re drastically cutting down on the likelihood of a mistake while saving yourself valuable time and energy.