Taxes can make many landlords sweat.
You don’t have to be one of them. By researching rental property taxes beforehand, you can make tax season a fruitful time instead of a dreaded one.
After all, advantageous tax deductions for landlords can save you hundreds of dollars every year. There’s no better reason to devote your attention to taxes for a few hours or more than the opportunity of maximizing your deductions and credits.
One critical aspect of taxes is record keeping. If you plan to claim any deductions, you might be asked to prove that you deserved to do so—and this means producing records and receipts. If you didn’t keep thorough and dedicated records during the year, you’ll have a difficult time proving to the IRS that the deductions you took were valid.
So, what kind of records should you keep? What are some best practices for record keeping?
Here are the two main types of records you’ll need for tax season and some tips for keeping them.
Records of Rental Income and Expenses
The first type of records you need are rental income and expense records.
Tracking your income and expenses throughout the year is important year-long. This is how you’ll calculate your rental profits or losses, which are taxed or deducted, respectively.
For every expense you deduct, keep a copy of the invoice or bill. The document should include:
- The type or name of the expense
- The total amount you paid
- Who you paid (a contractor, management company, store, etc.)
- The date of the transaction
For rental income, keep copies of payment records from your online rent collection software. If your tenants pay by check or another method, keep records of this income as well.
When it’s time for taxes, all you need to do with these records is transfer them to Schedule E. Schedule E is the primary IRS tax form for reporting rental income and expenses. This is where most of your deductions will be found, so pay attention to Schedule E before you file.
If you own multiple properties, each one’s income and expenses should be reported on Schedule E.
Equally important to Schedule E are supporting documents, which are written proof of the above records. Supporting documents include receipts, invoices, credit card records, online payment records, etc.
Why do you need supporting documents? These records are necessary if you are audited. Certain deductions, like those for travel and transportation, are heavily scrutinized by the IRS. If you don’t have a paper trail to back up your expenses, you won’t be able to take the deduction.
Before you file, ask yourself whether you are claiming any of the following rental property tax write-offs:
- Travel (hotel bills, tickets, food, etc.)
- Transportation (gas, public transit)
These expenses are the most scrutinized, so you have an extra burden of proof to justify deducting them. For instance, certain travel and transportation deductions are only applicable if you meet certain hour requirements, while meals are usually only partially deductible. Keep these kinds of records for each expense:
- Sales receipts
- Bank account statements
- Canceled checks
- Credit card sales slips
- Agendas or hourly calendars of your rental activities
- Petty cash slips for smaller cash payments
By setting aside supporting documents for your expenses, you will already have the proof you need in case of an audit.
Tips for Successful Record Keeping
As you gather your records for tax season, here are a few tips:
- Make digital copies of paper records. Hard copies can be lost, destroyed, or misplaced. Digital documents, on the other hand, are resilient and backed up (especially if saved on the cloud).
- Organize records by category and date. This will make your job easier when it’s time to list your expenses on Schedule E.
- Look out for Tax Cuts and Jobs Act benefits. Enacted in 2018, this law provides many useful deductions for landlords, such as the pass-through and home office deductions. Know about these deductions ahead of time so you can keep adequate records.
- Ask vendors and contractors for separate invoices. If your contractor performs multiple jobs for you but sends you one bill, ask for separate invoices. This way you can separate repair- and improvement-related activities, which are deducted separately. If the IRS sees an expense with multiple components, even one component that doesn’t meet the criteria for a deduction may prevent the whole expense from being deducted.
Filing taxes for your rental property is more complicated than keeping the records we’ve outlined here. However, record-keeping is an essential part of the process. By understanding these basics—and enlisting the help of a tax professional when necessary—you can count on your knowledge to help you secure the best tax deductions next year.