September 1, 2022

If you are a real estate investor, there are a lot more financial numbers to keep track of besides just the rental income you generate. If you only keep track of income, you’d be responsible for a larger tax bill at the end of each year than you anticipated. Tracking expenses helps ensure that the investment is profitable overall. It also allows you to deduct as many of your costs as possible, which decreases tax liability and increases the bottom line. If you are curious of the best ways to track rental property expenses, use the below guide to help you keep track of everything.

What To Track?

Writing your rental property expenses down and proving them are two different things. It’s important to keep a careful log, but let’s first look at what you need to prove your expenses, especially if you’re planning on writing them off.

Leases – Keep all current and past leases for several years. You don’t want to be blindsided by surprise when something pops up unexpectedly from a prior years’ tax returns.

Proof Of Rent Collected – Make sure to keep proof of all the rent you’ve collected. If you collect rent digitally, track it. If you collect checks, make a copy of the check.

Copies Of Bills – Keep copies of all bills you pay connected with running the property, including tax bills, utility bills, and insurance bills.

Mortgage Papers – Keep all mortgage statements and proof of payments if you have a mortgage out on the property.

Legal Fees – Keep a receipt and make copies of any legal fees you incur in connection with the property.

Sale Papers – You must report the profits on your tax return if you sell any investment property. Understanding capital gains and how you can offset them is critical, and purchase contracts are an essential part of this equation. You should also make sure any expenses you pay in connection with the property are reasonable for the area. You should never attempt to increase what you pay and should always have keep good records for proof.

Best Ways To Track Expenses?

Similar to personal finances, these is not one right or wrong way to track rental property expenses. There are many ways to accomplish the same end goal so it’s ok to do whatever works best for your specific needs. The best approach is one that allows you to keep track of things in real time. It’s important to keep on top of expenses to ensure you file your taxes properly and get all the deductions you are entitled to.  Below we will look at some best ways to track rental property expenses.

Accounting Software

Luckily, in 2021 there are many accounting software programs to help you track your rental income. Programs like QuickBooks and TurboTax all provide solid options for real estate investors.  Do your research and figure out which one you understand the most and will use consistently as they all have costs associated with them. Many options have a free trial, so you can try before you buy. Take advantage of these free trials so you don’t pay for a program that doesn’t work for your needs.  The right program for you will vary based on the number of properties you have, your total expenses, and the complexity of all your other business needs.

Property Management Software

Property management software is a specific product meant just for real estate investors. They can help you track rental income, automatically track income and expenses, and keep track of all your real estate investment properties in one place. Most of these programs also offer a free trial so you can see how they work and determine if they’re a good fit for your business needs. Next we will look at some common expenses to be aware of.

Common Expenses

Tracking your real estate investment expenses is critical. Here are the most common rental expenses most investors pay: Mortgage costs, closing costs, inspection fees, appraisal fees, real estate commissions, marketing and screening costs, maintenance costs, repair costs, materials, as well as any legal costs. Most real estate investors have fixed and variable rental property expenses.

Fixed expenses include:

Mortgage payments, utility fees, trash fees, property taxes, home insurance, property management fees, as well as any required HOA fees. Other fees you may have include the costs to find a new tenant, maintenance and repairs, vacancy costs and major improvements.

What’s Considered Rental Income?

Rental income includes all of the following in addition to the rent you receive:

Security Deposits – You are required to claim any security deposits earned if it’s not returnable at the end of the lease. If your lease includes a clause to return the security deposit, it’s not income, but the difference is taxable if you do not return the entire sum. If you collect the first and last month’s rent when you accept a lease, that’s also income that needs to be tracked.

Other Tips To Track Expenses

As you can see above, there is a ton that goes into preparing taxes when you own rental property. Everything you spend or collect matters and makes a huge difference in the amount of taxes you owe at tax time.  To make sure you accurately track your rental property expenses, consider the following:

Keep your business bank account separate. It’s challenging to differentiate between personal and business income and expenses when you keep them all together. It’s wise to open a separate bank account and conduct all business from that account. Keep track of all receipts. Its smart to scan copies of them and store them on our computer or phone to always have a record on file.  Regardless of what system you decide is best for you, figure out a system and subscribe to the software that suits your needs the most. Take the help above to maximize your tax write-offs by staying organized as a real estate investor.