As a landlord, it is not only important to collect rent on time each month, but it is just as important to keep accurate real estate accounting records. As a taxpayer there are federal tax responsibilities that come along with owning rental real estate. Taxpayers must report all rental income on their tax return, and any associated expenses can be deducted from their rental income.
The most common method of accounting used by landlords is the cash basis method. If a landlord is a cash basis taxpayer, they will report rental income on their return for the year they receive it, regardless of when it was earned. A landlord who is a cash basis taxpayer, generally deducts their rental expenses in the year they pay them. The opposite is true when a landlord uses an accrual method. They will generally report income when they earn it, rather than when they receive it and will deduct their expenses when they incur them, rather than when they pay them.
All amounts received in rent must be reported as gross income by a landlord. Rental income is classified as any payment received for the use or occupation of property and must be reported for all properties. In addition to normal rent payments, there are other amounts that may be classified as rental income including:
- Amounts paid to cancel a lease
- Advance rent
- Expenses paid by a tenant
- Security deposits
If a landlord is receiving income from the rental of a dwelling unit, there are rental expenses they may deduct on their tax return. These deductions apply to mortgage interest, property taxes, operating expenses, depreciation, and/or repairs.
Landlords can deduct the ordinary and necessary expenses for managing, conserving, and maintaining their rental property. Ordinary expenses are those that are common and generally accepted in the business. Necessary expenses are those that are deemed appropriate, such as interest, taxes, advertising, maintenance, repairs, property management, utilities, and insurance.
It is important for a landlord to keep organized and concise records of all income and expenses related to their rental properties. Good records will help the landlord monitor the progress of their rental property, prepare financial statements, identify the source of receipts, track deductible expenses, prepare their tax returns, and support items reported on tax returns. Landlords must be able to substantiate certain elements of expenses to deduct them. Generally, the landlord must have documentary evidence, such as receipts, canceled checks or bills, to support their expenses. Keep track of any travel expenses that are incurred for the rental property.
If you need assistance assessing your Real Estate accounting records, please get in touch with us. The Innovative CPA Group provides services, solutions, and guidance based on our real-world experience in the real estate industry. Please contact us by visiting our contact page or via our contact form.