As a landlord, tracking your operational expenses is key to your bottom line. This will not only help you keep organized, but will also simplify things for you come the tax season.
In today’s blog, we’ll provide you proven tips on how to track rental property expenses.
What are the various rental expenses for landlords?
To know what you should be keeping track of, check the Schedule E form. This is a form that landlords are required by the IRS to use to report any income or losses they incur from renting out their properties. Common rental expenses include:
Re-renting costs. To fill a vacancy after a tenant has left or when renting out your property for the first time, you’ll need to market it. The marketing process will usually involve spending some money on things like creating an ad and distributing it. Sometimes this can be done through a property management company.
Transportation costs. This includes the transportation costs incurred to drive back and forth to your rental.
Maintenance costs. This is an inevitable cost for landlords. You’ll eventually need to maintain your property. Examples of such tasks include painting and yard work.
Professional fees. The fees involved in hiring an attorney for legal counsel or a real estate agent to buy and sell properties would fall under this category.
Insurance costs. You can report a variety of insurances, such as hazard, homeowners and flood insurance.
Property management fees. Have you outsourced the management of your rental property to a property management company? If you have, then you’d also need to include those fees in this category.
Utility costs. Some utilities will be on the landlord’s name while others will on the tenant’s name. However, when it comes to summing up your expenses, you should only include those that you’re liable for.
Taxes. You can include a myriad of taxes in this category. Some examples include property taxes, school district taxes, land taxes and special easements. Income taxes don't fall in this category.
Repair costs. Repairs are a common expense that landlords incur. You may need, for example, to replace a broken tile or a broken window. However, you should not include costs you’d incur to renovate your property, such as replacing the roof, floors, or any other capital improvement.
Of course, this isn’t an exhaustive list of all expenses landlords should keep track of. Check the Schedule E form for additional listings.
How should you track rental property expenses?
Tracking rental expenses is crucial for calculating ROI and understanding how profitable your property is. You can track rental property expenses in either of two ways.
One option is to track them manually. This means creating a spreadsheet on Google Sheets or Excel, or even doing it by hand using a worksheet. You may also need to organize receipts in a folder.
As you’d expect, this process can prove daunting, stressful and time-consuming. Luckily, there is a better option…
The second option is by using online tools. These tools are often not only convenient, but are fast and secure as well. Unlike the manual option which is time consuming and taxing, online tools make data entry a breeze.
How to report rental income and expenses to the Internal Revenue Service (IRS)?
Besides reporting rental property expenses, you’ll also need to report rental income. The IRS defines rental income as the gross income a landlord receives as rent.
Aside from normal rent payments, rental income includes lease cancellation fees, security deposit, advance rent payments, tenant-paid expenses and property or services received in lieu of rent.
However, there is an exception when it comes to security deposits. You should only report it as rental income if you are withholding a portion. However, if you’re refunding it back to the tenant, you shouldn’t include it.
So, how exactly do you report rental income and expenses? To report rental income and expenses, the IRS requires that landlords use Form 1040 or 1040-SR, Schedule E.
What deductions does the IRS allow during the tax season?
As a landlord, the IRS allows certain deductions to be made from the income tax return. By taking advantage of these deductions, you can reduce your tax burden significantly and boost your annual profits.
The following is a list of deductions that you may be eligible for under IRS code.
Insurance costs. You can deduct the premiums you incur to insure your property against certain perils, such as fire, flood and theft.
Employees’ wages. You can deduct the expenses you incur to pay employees, whether they work for you full-time or not.
Interest rates. You can deduct any interests you incur on your property mortgage or any other business loan you’ve taken for that matter.
Travel expenses. Do you have to travel back and forth to your rental property? Or, do you use your vehicle to do things like buy supplies or to go show your property to prospective tenants? If you do, then the costs of doing so can be reimbursed as per the IRS. However, for that to happen, you’d need to keep track of your mileage.
Professional fees. The IRS allows landlords to deduct the cost of all business-related professional fees. For example, the cost incurred to hire an attorney to review your rental contracts, or the cost of hiring an accountant to manage your books.
Other common deductible expenses include repairs and maintenance, home office costs and depreciation.
There you have it. Everything you need when it comes to tracking your rental property expenses. Keeping on top of your rental property expenses will help you maximize tax deductions, be prepared for IRS audits and even help you determine how profitable (or otherwise) your property is.
If you’re just starting out as a landlord, seeking expert help can be ideal. A professional will have the experience and the systems in place to help you keep track of your inflows and outflows. Pinnacle Property Management has over 30 years of property management and real estate experience.
Our full suite of property management services will ensure your Torrance, CA rental property realizes its full potential in terms of ROI. Get in touch today to learn more!