As a landlord, property manager, or real estate investor, it’s important to understand the basics of real estate accounting. In this post, we’ll talk about what goes into your income and expense statement, how to depreciation your property, and more. By understanding these concepts, you’ll be able to keep your business running smoothly!
The basics of tracking rental income and expenses
As a landlord, it’s important to keep track of your rental property income and expenses for two main reasons:
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To comply with the law. The IRS requires that landlords report their rental income and expenses on their taxes.
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To make sure you’re making a profit. If you’re not tracking your income and expenses, it’s difficult to know if your rental property is actually making money.
So, what exactly goes into your income and expense statement? Here’s a list of common items:
Income
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Rent from tenants
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Late fees
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Security deposits returned to tenants
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Laundry income (if you have coin-operated machines on the premises)
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Parking fees (if you have a parking lot or garage)
Expenses
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Mortgage interest
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Property taxes
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Insurance
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Property management fees
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Maintenance and repairs
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Utilities
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Advertising
How to calculate depreciation on your rental property
Depreciation is an important concept for landlords to understand because it allows them to deduct the cost of their property from their taxes. To calculate depreciation, you’ll need to know the purchase price of your property, the the cost basis, and the expected useful life of the property, and the salvage value of the property. The IRS has a helpful guide that you can use to figure out the amount you can deduct each year.
Keep in mind that you can only start depreciating your property after it has been rented out to tenants. And, when you do eventually sell the property, you’ll need to pay taxes on the depreciation that you’ve deducted.
Other important considerations for rental property accounting
There are a few other things that landlords should keep in mind when it comes to their rental property accounting:
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Rental income is taxable. Be sure to set aside money each month so that you can pay your taxes when they’re due.
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You can deduct expenses related to traveling to and from your rental property. This includes gas, airfare, lodging, and meals.
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You can deduct the cost of professional services, such as accounting, legal, and cleaning services.
By understanding the basics of rental property accounting, you’ll be in good shape to manage your property effectively and keep your business running smoothly. If you have any questions, be sure to speak with a professional accountant or tax advisor. They can help you navigate the ins and outs of rental property accounting and make sure that you’re in compliance with the law.
Setting up your rental property accounting system
A rental property chart of accounts is a list of all the financial transactions that take place in your business. This includes things like income, expenses, assets, liabilities, and equity. The chart of accounts will help you keep track of your finances and make sure that your business is running smoothly.
The first step in creating a rental property chart of accounts is to choose an accounting method. The most common methods are cash basis and accrual basis. Cash basis accounting is simpler and more straightforward, but it doesn’t give you as much information about your business. Accrual basis accounting is more complex, but it sometimes provides more insight into your business.
Once you’ve chosen an accounting method, you’ll need to set up a double entry accounting system. This means that for every transaction, there will be two entries: a debit and a credit. The debit will go on one side of the ledger and the credit will go on the other.
For example, let’s say you purchase a rental property for $100,000. The debit would go on the asset side of the ledger and the credit would go on the liability side. This is because you now have an asset (the property) that is worth $100,000 and you have a liability (the mortgage) for the same amount, assuming the property is 100% financed.
Once you’ve set up your double entry accounting system, you’ll need to create a real estate balance sheet. This is a document that shows all of your assets and liabilities, as well as your equity in the property. The balance sheet will help you keep track of your finances and make sure that your business is running smoothly.
To create a real estate balance sheet, you’ll need to list all of your assets and liabilities, as well as your equity. Your assets will include things like the purchase price of the property, the mortgage, and any repairs or improvements that you’ve made. Your liabilities will include things like the mortgage, any outstanding loans, and any money that you owe to contractors or suppliers. And your equity will be the difference between your assets and liabilities.
Once you’ve set up your accounting system, you’ll be ready to start tracking your income and expenses. Be sure to keep good records so that you can accurately report your rental income and expenses on your taxes.
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How to stay organized and on top of your rental property accounting
It’s important to stay organized and on top of your rental property accounting. One way to do this is to create a paper trail. A paper trail is a record of all the financial transactions that take place in your business. This includes things like income, expenses, assets, liabilities, and equity. The paper trail will help you keep track of your finances and make sure that your business is running smoothly.
Another way to stay organized and on top of your rental property accounting is to use a software program or app. There are many different programs and apps available, so be sure to choose one that best fits your needs. Some programs and apps allow you to track your income and expenses, while others also allow you to manage your rental properties.
No matter how you choose to stay organized and on top of your rental property accounting, be sure to keep good records. This will help you accurately report your rental income and expenses on your taxes.
Key financial statements every rental property owner should know
Financial statements are important for landlords because they provide a snapshot of the financial health of their business. They can help landlords identify areas where they are doing well and areas where they need to improve.
Five of the most important rental property financial statements are the balance sheet, income statement, cash flow statement, owner’s equity statement, and rent roll:
Balance sheet
The balance sheet is a document that shows all of your assets and liabilities, as well as your equity in the property. The balance sheet will help you keep track of your finances and make sure that your business is running smoothly.
Income statement
The income statement is a document that shows your rental income and expenses for a specific period of time. This statement will help you track your profitability and identify areas where you can improve your business.
Cash flow statement
The cash flow statement is a document that shows how much money is coming in and going out of your business. This statement will help you track your cash flow and make sure that you have enough money to cover your expenses.
Owner’s equity statement
The owner’s equity statement is a document that shows the amount of equity that you have in your rental property. This statement will help you track your progress and see how much equity you’ve built up over time.
Rent roll
The rent roll is a document that shows all of the tenants who are currently renting from you, as well as the amount of rent that they are paying. The rent roll will help you keep track of your tenants and make sure that they are up to date on their rent.
These are just a few of the most important rental property financial statements. Be sure to keep good records so that you can accurately track your income and expenses. This will help you run your business more efficiently and make better decisions about your rental properties.
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How to prepare for tax time when you own rental property
As a rental property owner, tax time can be a bit more complicated than it is for those who don’t own rental property. But with a little preparation, you can make sure you’re ready come tax time.
One of the most important things you need to know is IRS Schedule E. This is the form that you’ll use to report your rental property income and expenses.
Here’s a quick rundown of what you need to know about IRS Schedule E:
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Rental property owners must file Schedule E when they have rental income from real estate.
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You’ll use Schedule E to report your rental property income and expenses.
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Your total rental income or loss will be reported on Form 1040, Line 21.
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You’ll need to attach Schedule E to your Form 1040 when you file your taxes.
Now that you know a little bit more about IRS Schedule E, let’s talk about how you can prepare for tax time as a rental property owner. Here are some tips to help you get ready for tax time:
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Stay organized throughout the year. This will make it much easier to compile your information come tax time.
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Keep track of all your rental income and expenses. This includes things like advertising, repairs, insurance, and property taxes.
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Keep good records of everything related to your rental property. This includes receipts, cancelled checks, and contracts.
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Hire a qualified accountant or tax preparer. This is especially important if you have multiple rental properties.
By following these tips, you can make sure you’re prepared come tax time. With a little preparation, filing your taxes as a rental property owner can be a breeze.
Common mistakes rental property owners make with their finances
Rental property owners are often surprised to find out how much work is involved in keeping track of their finances. From advertising and repairs to insurance and property taxes, there are a lot of expenses to keep track of. And if you’re not careful, it’s easy to let your finances get out of control.
One of the most common mistakes rental property owners make is failing to keep good records. This can include things like receipts, cancelled checks, and contracts. Without good records, it’s hard to keep track of your income and expenses and make sure everything is accounted for come tax time.
Another common mistake rental property owners make is not hiring a qualified accountant or tax preparer. This is especially important if you have multiple rental properties. A qualified accountant can help you keep track of your finances and ensure everything is reported correctly come tax time.
Finally, many rental property owners overlook the importance of insurance. Rental property insurance can protect you from a variety of risks, including damage to your property and liability in the event that someone is injured on your property. Make sure you’re adequately insured before renting out your property.
By avoiding these common mistakes, you can make sure your rental property business stays on track financially. With a little effort, you can keep your finances in order and avoid any stressful surprises come tax time.
The benefits of using rental property accounting software
Rental property accounting software is a tool that landlords and property managers can use to keep track of their rental income and expenses. The most popular rental property accounting software programs offer features like online rent collection, automatic bank account reconciliation, and expense tracking.
Benefits of using rental property accounting software include:
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Save time by automating tasks like rent collection and bank account reconciliation.
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Get a clear picture of your income and expenses so you can make informed decisions about your rental business.
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Avoid late fees and penalties by staying on top of your finances.
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Reduce the risk of fraud by using security features like password protection and data encryption.
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You can track important information like unit occupancy and rental payments.
If you are a landlord or property manager, using rental property accounting software can save you time and money. Choose a program that offers the features you need to run your business effectively.
Final thoughts and key takeaways
Rental property accounting is vital for anyone who owns rental property. From understanding which expenses are deductible to keeping good records, rental property accounting can save you time and money come tax time. By following these tips, you can make sure you’re prepared come tax season.
Credits: Photo by Kelly Sikkema on Unsplash, blog post written by J. Scott Digital freelance copywriting services.