IRS Tips for Good Record Keeping: Rental Income and Expenses
If you own rental property, it is important to keep accurate records of your rental income and expenses.
Good record keeping not only helps you manage your rental property effectively but is also required by the IRS.
The IRS requires proper record keeping for rental income and expenses to ensure that landlords are accurately reporting their rental income and deductions on their tax returns.
In this post, we will provide tips for good record-keeping for rental income and expenses to help you stay organized and compliant with IRS regulations. These tips will help you avoid potential penalties and keep your rental property finances in order.
Let's get started by discussing how to record rental income.
Records to Keep For Rental Income
Rental income refers to the rent payment that a landlord receives from tenants for the use of their property.
To properly document rental property income, you should keep the following records:
- Dates and amounts of rent received: Keep a record of the dates when you received rent from your tenants, along with the amount received. This will help you to accurately calculate your rental income for tax purposes.
- Security deposits: If you require tenants to pay a security deposit, you should keep a record of the amount received and the date it was received. You should also document any deductions made from the deposit and the reason for those deductions.
- Rental applications and leases: Keep a copy of all rental applications and leases, as they contain important information about the tenant, the rental agreement, and the terms and conditions of the lease.
- Bank statements and receipts: Keep bank statements and receipts that document rental income, such as rent checks deposited into your account or online payment records. These records can also help you reconcile your rental income with your bank account.
Now that you understand the numerous receipts and records that must be kept, it's important to know how to maintain your records without breaking the bank or your head.
There are numerous paths you can take in terms of record retention that might be helpful for you, such as:
- Creating a spreadsheet or database to keep track of rent payments and security deposits.
- Keeping a physical or electronic copy of rental applications and leases.
- Scanning paper receipts and storing them in a digital file.
- Using trusted property management software, such as DoorLoop to help you automate record keeping and integrate them with your bank account.
Keeping detailed records of your rental income allows you to easily track payments, identify missed payments, and have a clear record of your rental income for tax purposes, so ensure that you choose the method that best works for you.
Records to Keep For Rental Expenses
Rental expenses refer to the costs incurred by landlords to manage and maintain their rental property. Keeping accurate records of rental expenses is important for properly calculating deductions on tax returns.
Rental property accounting can become overwhelming, so here are some records that you should keep when documenting rental expenses:
- Receipts for repairs, maintenance, and improvements: Keep receipts for repairs, maintenance, and improvements made to the rental property, such as painting, fixing appliances, and repairing the roof. These expenses can be deducted from your rental income on your tax return.
- Invoices for services, like cleaning and landscaping: If you hire a service provider to perform cleaning, landscaping, or other services for your rental property, keep invoices as documentation of these expenses.
- Mortgage and property tax statements: Keep statements for mortgage payments and property taxes paid on the rental property. These payments are considered deductible expenses on your tax return.
- Insurance premiums: Keep records of insurance premiums paid on your rental property. Insurance premiums for rental properties are also tax deductible.
- Utility bills: Keep records of utility bills paid for the rental property, such as electricity, gas, water, and internet. These expenses may also be deductible on your tax return.
Keeping records of rental expenses can be tricky but you can start by using accounting or property management software to help you track expenses and generate reports for tax purposes.
You should also set up a filing system for storing paper receipts and invoices, such as a folder or binder for each rental property.
Keeping digital copies of receipts and invoices in a cloud-based storage system, such as Google Drive or Dropbox is also helpful when keeping expense records.
Finally, you can also use credit cards or bank accounts exclusively for rental property expenses to simplify tracking and record keeping.
Next, we'll explain how long to keep these records.
How Long to Keep Rental Records
Keeping records of rental income and expenses is not only important for tax purposes but is also essential for any potential legal or business disputes.
The general rule of thumb is that rental records should be kept for at least three years after the due date of the tax return or the date the tax return was filed, whichever is later.
However, some records should be kept for longer, so make sure to research the specific record.
For example, rental applications and leases should be kept for the duration of the lease and for at least three years after the lease expires.
Bank statements and receipts need to be kept for at least three years after the due date of the tax return or the date the tax return was filed, whichever is later.
Receipts for repairs, ordinary and necessary expenses, maintenance, and improvements should be kept for as long as you own the rental property plus at least three years after the due date of the tax return or the date the tax return was filed, whichever is later.
After the retention period is over, it's best to dispose of the records securely to protect sensitive information.
Shred paper documents and securely delete digital files.
If you do not keep records for the proper amount of time, you could be subject to penalties and fines from the IRS.
In addition, if you are involved in any legal or business disputes, having detailed rental records can be critical to protecting your interests and resolving the dispute in your favor, so ensure that you are always protected.
Record-Keeping Methods For Rental Income and Expenses
Record keeping is an essential part of managing and should be top of mind for rental property investors.
As a landlord, you need to keep track of rental income and expenses to ensure you are making a profit and to prepare for tax season.
There are different methods of record keeping, and in this section, we will explore them.
First, manual record keeping involves using pen and paper to record transactions.
You can use a notebook or spreadsheet to track income and expenses. This method may work for landlords with a few properties, but it can be time-consuming and prone to errors. Additionally, it can be challenging to organize physical records and can easily get lost or damaged.
Electronic record-keeping, on the other hand, involves using software to manage rental records.
Software options such as DoorLoop are highly valued by real estate investors.
These software options offer features like rent tracking (allowing you to see when a specific tenant pays rent), expense management, and reporting.
Electronic record keeping is more efficient than manual record keeping, and it allows landlords to easily access and organize records, if you want to learn more about property accounting software, check out this article.
When it comes to properly tracking and managing your rental income, good record-keeping is critical for staying organized, avoiding potential penalties, and complying with IRS regulations. Those basic tax forms can cause a lot of trouble, believe it or not!
It's also important to know how long to keep these records and dispose of them securely after the retention period is over. Using accounting or property management software, setting up a filing system, and keeping digital copies of receipts and invoices can help simplify tracking and record keeping.