Are you having a hard time tracking the expenses associated with your rental properties? Maybe you have recently decided to double down on your property investment and do more with rental homes than you were previously, meaning you need to be more serious about tracking what you're spending and receiving from tenants.
Are you having a hard time tracking the expenses associated with your rental properties? Maybe you have recently decided to double down on your property investment and do more with rental homes than you were previously, meaning you need to be more serious about tracking what you're spending and receiving from tenants.
No matter the reason, property managers need to make sure they're keeping their heads above water; tracking every expense that comes your way is critical to maintain business solvency and make sure you're actually participating in a good investment. True Vision By Knowledge offers a few tips to get your expense tracking in the right place and keep your budget in the black.
Check Your Deductions
Rental property owners can deduct several key expenses from their taxes, including mortgage interest, repairs, operating expenses, and property tax. In addition, you can claim start-up expenses if this is your first rental property (up to $5,000) and small gifts that you leave for tenants (up to $25 per person).
A note on repairs: You may be tempted to claim "improvements" as repairs, but they are not the same thing. Improvements are activities that improve the quality of the rental property, such as installing a dishwasher where there was none previously, or new bathroom cabinets and paint. If you replace a broken dishwasher or simply fix the toilet - those are repairs and would qualify for this particular deduction.
Note Your Records
You need to maintain a good record-keeping system if you are going to succeed in any business, and rental property management is no different. There are two types of records you'll need to hang onto:
Profit and loss statement: This document is a record of revenues and expenditures that a business has for a period of time. It is usually presented in summary format.
Receipts: You'll need these in order to claim the deductions in the first step anyway! These receipts are the corroborating evidence for your profit and loss statement.
These two types might seem simple enough, but when you get into the actuality of the situation, it can sometimes be hard to know what to keep and what to get rid of. When in doubt: Keep everything. You need tenant files (including email correspondence), applications, contracts, and any legal actions you have needed to take; you also need to keep move-in inspection paperwork, any information you use to market your place, and copies of every insurance policy. Property management systems are a great way to keep these documents safe and backed up.
Upgrade Your Accounting System
One of the biggest red flags for the Internal Revenue Service is an abundance of large, vague expenses. Real estate investors need to make sure that if they are making large purchases, they have recorded those. A robust accounting system and batch invoicing software program like Quickbooks Online Advanced makes recording and organizing these expenses easy. You can track where your money is, where it should be, and where it's going with just a click.
Keeping detailed records of every transaction you do related to your rental property is key. Not only is it important in case you're audited by the IRS, but staying organized is also a good way to ensure you're not overpaying your taxes by not taking enough deductions. Staying organized will help you be fully prepared when you have to file your taxes next year.
It's worth noting that when it comes to your taxes, you can take advantage of various benefits when you formalize your rental setup as a business. An LLC can be a great choice here since it offers asset protection as well as tax perks. ZenBusiness shares information on how to start an LLC in Michigan to enjoy these benefits.
Moving forward
When your expenses are organized, your business does better. You can breathe easier knowing that your rental property management business is being run effectively and profitably.
Photo by Olya Kobruseva from Pexels
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