Tracking Your Rental Property Expenses

Written by: Eric Davis

One of the reliable ways to get an additional passive income is to rent out your second home or build/buy a property designed for such a purpose. Investing in the rental/leasing market is so easy and stable…it rarely gets affected by factors that normally affect other types of business or investments. While inflation, politics, and the economy still play a pivotal role in the growth of the rental market, it does not get affected as severely as the stock market or other forms of trade investments, or even other types of real estate.

Rental income^[1] is the gross payout you receive from renting out your property. Your rental income originates from the regular rent payments, lease cancellation fees, and other charges that your tenant must pay. In some cases, the tenants must reimburse their landlords for paying for their repairs or utilities. These payments are also considered rental income. However, security deposits are not included as a rental income unless used as a final rent payment or are used as payment for rental damages or eviction. On the other hand, Rental expenses consist of costs from operating and handling the rental property. Common expenditures are mortgage, taxes, repair and maintenance, property such as salaries, and legal and professional fees.

IRS sets policies for claiming rental income and expenses. Visit and review them to recognize and separate income from costs easily.

A sample photo of tracking expenses.

Monitoring Your Expenses

As busy as can be- the property manager and landlord still need to be on top of everything. Business transactions should be quickly assessed, as well as proper documentation.

There are two kinds of records for tax purposes:

• Income and expenses data – Your rental activity can be monitored by summarizing your income and expenditures. This way, you’ll be able to know if your business made a profit or gained losses over the years.
• Alternative and supporting papers of earnings and costs – Receipts and other documents like owner statements are needed

Assuming you own more than one investment property, you should independently monitor your revenue and expenditures for every property, don’t combine them as one. An effective strategy is crucial for documenting rental payments and expenses. The landlord should account for the rent and costs the moment it incurs without delay to avoid problems in the future. Analyzing the rental profit will be difficult when the financial records are inaccurate. Proper record-keeping is also beneficial in the long run.

Three Things Needed to Track Your Expenses Properly

⦁ Correct Information and Data– To easily organize transactions and update financial data, determine what you need to track. Categorize your expenses:

• Recurring costs like rent, pet, and parking fees
• Move-in fees, maintenance, and other legal fees
• Lease breakage fees for tenants
• Security deposits that use as last month’s rent or to cover outstanding property damage charges
• Recurring monthly expenditures (taxes, loan, and HOA fees)
• Property depreciation^[2]

⦁ Set up a Bookkeeping Method – Monitoring property expenses can be done in alternate ways that you are comfortable doing. You can do it by hand, making worksheets and organizing receipts by scanning them and saving them in computer folders or storing them physically. Another option is using accounting software like Appfolio,  Avail Rental Property Accounting tool, TurboTenant, QuickBooks, Bench, and Xero. Using these tools is a time-saver, secure, and will provide you better accessibility in preparing for the tax season.

⦁ Review Income and Expenses Statements – Discrepancies between your financial papers and bank reports can occur, so to ensure everything matches do a periodic audit. Performing this will allow you to detect things that need revising in advance and filing taxes will be a piece of cake.

Different types of paper bills.

Types of records you need to save

• Receipts and invoices: Documents from maintenance or contractors like utility companies and suppliers served as proof of expenses and needed to be recorded.
• Rent Payment Copies: This document will show how much rent was paid and when it’s paid, and the property address. Another paper that needs to be recorded
• Loan and tax documents: Mortgage documents, federal and state tax returns, and other loan papers are vital records that you need to be recorded for easy reference.
• Bank statements: Statements transactions from your banks are a great form to present the income and expenses, but they should only be for property-related transactions.

Below are the samples of the utmost significant reports to keep:

⦁ Current and previous tenant contracts.
⦁ Copies of your and your tenant’s interactions.
⦁ Copy of legal documents like penalties, assessment reports, court appearances, and settlement statements.
⦁ Insurance policies and Mortgages papers.
⦁ Tax information from previous years.
⦁ Property titles and deeds.
⦁ Benefits and employee salaries
⦁ Advertisement fees copy from marketing the rental property
⦁ Office utility bills and supply fees
⦁ Invoices/receipts of property maintenance and repairs

Benefits of Tracking Your Expenses

• Keeping detailed records implies you won’t overlook expenses and won’t wind up overpaying your taxes. Getting your reports in order and having proper documentation helps you file your taxes in a breeze.
• Having a list of where the finances go in and out will help you strategize on increasing your revenue and decreasing your expenditures.
• Your finances will be more available and easier to access, giving you a chance to prepare for your future development and earn your business goals.

Tracking expenses benefits.

Government institutions such as the IRS audit each company every year, and t is your duty to provide necessary documents to back up your tax claim if there are questions to avoid charges and penalties.

Getting your finances on track can be overwhelming yet a crucial job for all involved. Setting up a system will help you ease the pain and provide you additional time to focus on other things. Falsifying financial records can negatively impact your NOI and risk being audited by the IRS. Davis Property Management will take care of everything you need to ensure that your investment pays out. DPM representatives are skillful and creative when dealing with all situations and committed to the tasks. We always go beyond what is required in a professional and approachable manner. Contact us now so we can assist you. Send us an email at info@davispropertymanagement.com or call us at 425-658-7471.

Watch the video below for more details on tracking your rental expenses

Links References:

^[1] – https://www.irs.gov/businesses/small-businesses-self-employed/tips-on-rental-real-estate-income-deductions-and-recordkeeping
^[2] – https://www.avail.co/education/articles/what-is-rental-property-depreciation
https://www.avail.co/blog/avail-introduces-a-new-rental-property-accounting-feature
https://bench.co/partner/friends-of-bench
https://www.xero.com/us/
https://www.irs.gov/taxtopics/tc414
https://corporatefinanceinstitute.com/resources/knowledge/accounting/net-operating-income-noi/
https://www.irs.gov/