Introduction
Record-keeping is an essential part of managing your rental properties. Knowing how to keep rental property records effectively gives you a leg up on others in the property management business.
Whether you’re new to the game or a seasoned landlord, having solid records can make a significant difference.
Taxes shouldn’t require last-minute scrambling to pull everything together; instead, you should prepare for them throughout the year. Keeping meticulous records will not only help you stay organized, but it will also save you valuable time and effort when tax season inevitably rolls around.
Let’s explore some practical tips to streamline bookkeeping for landlords and simplify your financial management.
Use Property Management Software
In the past, landlords relied heavily on physical copies and paper for their bookkeeping. But times have changed, and technology has become a powerful tool in managing rental property records.
Accounting software for landlords can make a massive difference in how you manage your properties. These platforms are designed to automate accounting and bookkeeping tasks, helping to reduce the risk of error.
Anyone who’s made a mistake regarding accounting knows a minor error can lead to costly consequences.
By recording transactions in property management software, everything is kept in order and you save valuable time while you’re actively managing day-to-day rental property accounting tasks.
Keep Paper Records for the Past Seven Years
Though using technology is the way to go, you don’t want to abandon paper records completely. The Internal Revenue Service (IRS) recommends keeping physical copies of critical documents for the past seven years.
This includes journals, ledgers, year-end financial statements, tax returns, and supporting documents.
Get Everything in Writing
One of the golden rules of property management is to get everything in writing. This might sound like a no-brainer, but it’s worth emphasizing. Leases are legally enforceable documents, but they’re only effective if they are properly signed and securely stored. Whether it’s an agreement with a tenant or a stipulation regarding rent, be sure it’s in writing.
Having thorough documentation could prove invaluable if you ever find yourself in a court dispute or under audit. The more recorded proof you have, the better protected you’ll be.
Cash Versus Accrual Accounting Methods
As a landlord, you have two main options for how to record income and expenses: the cash or accrual method. Understanding the difference between these two methods is key to choosing the one that works best for your rental business.
- Cash method: Revenue and expenses are recorded when the cash changes hands. For example, if a tenant pays $1,000 in rent on February 2nd, you will record the income on that date.
- Accrual Method: Revenue and expenses are recorded when the transaction is incurred, regardless of when the cash is exchanged. In this method, you would record the February rent on the 1st, the day it’s due, even if the payment is received later.
The cash method is generally easier to manage and is often used by small businesses and sole proprietors. The accrual method is more common for larger companies, as it best demonstrates income and expenses over time.
Both have pros and cons, so it is worth researching which method fits your financial needs.
Keep an Itemized Record of All Income
The IRS requires landlords to disclose all income from rental properties. This includes not just rent payments but also any additional services you might offer, such as laundry facilities.
To stay on top of income, many landlords use a rent roll.
A rent roll is a snapshot of your rental income, tracking rent payments, lease terms, and any late fees in one centralized document. This helps you easily track who’s paying on time and where your income is coming from.
Maintain Records of All Expenses
Maximizing deductions is a key part of your tax season success as a landlord. This is why it is crucial to document every expense and make sure you understand the different deductions available to property owners and landlords.
These deductions could include repairs, maintenance, and property management fees. The IRS makes clear that to deduct an expense, you must have evidence such as receipts, canceled checks, or bills.
In the event of an audit, you should be able to substantiate every item reported on your tax return, or you risk penalties and additional taxes.
Use 1099 and W-9 Forms Wisely
If you hire independent contractors to perform work on your rental properties, you need to be familiar with 1099 and W-9 forms. If you pay a contractor over $600 in a year, you are required to issue them a 1099 form, which reports their income.
A W-9, on the other hand, is collected from independent contractors when they begin working for you, providing their taxpayer identification information.
Set Up Separate Bank Accounts for Each Property
To stay organized, it’s best to have separate bank accounts for each rental property you own. This makes tracking income and expenses for each property much easier. By having distinct accounts, you can quickly assess the financial performance of each property and be better prepared come tax time.
Maintain a Reliable Tracking System
While separate bank accounts are helpful, you also need a reliable system for tracking income and expenses. Accounting software designed specifically for landlords can help you stay organized. Many property management platforms, such as Innago, also offer built-in accounting features, which can streamline your financial record-keeping.
Conclusion
Effective record-keeping is a cornerstone of successful property management. By staying organized throughout the year and following these tips, you’ll save yourself the headache of scrambling when tax season arrives.
With a solid bookkeeping system in place, you’ll be able to focus more on growing your rental business and less on managing paperwork.
Also Read: How to Keep a Clean Home with Pets: Tips for a Fur-Free, Fresh Space.