Tips for Accounting for Rental Properties

0:00 Ralph: Do you own a rental property? Are you confused about how to keep track of rental income and expenses for tax purposes? We'll stick around today. As we dive into tips. For properly accounting for your rental property, if you own a rental or many rentals, or if you're considering getting into the rental business, this is a show you don't want to miss.

0:49 Thank you for joining us on this Saturday episode of the program. Today, we're talking about a topic that many real estate investors have questions about, and that's how to handle accounting for a rental property. This is a question we get routinely in our practice, whether you've just purchased your first rental property, or if you've been a landlord for many years, it's crucial to have a good system in place to track rental income and expenses. Proper accounting will ensure you maximize tax deductions. Avoid headaches at tax time. And trust me, that's what I want you to avoid and have all the documentation needed in case of an audit. And nobody wants to be in an audit. Today, we'll explore the best practices for accounting for your rental property.

1:31 So you can be a savvy steward of the investment. God has given you. Get ready to gather some key takeaways to implement for your rental business. It is a beautiful sunny, but it get big, cool morning here on the farm. As I drove over to the office to record this morning, the cows were awakened to a new day and the sound of a few roosters could be heard amidst the Lamb's calling for their moms from the farm next door. I'll tell you folks living on a farm is really a different kind of life, but they're certainly never a dull moment. Let's get to the topic today. Don't forget to subscribe to the show and join our email list. You do that at askralphpodcast.com . So you don't miss tomorrow's show. When we do our Sunday show.

2:12 And the topic we're going to talk about is it is finished. Your debt is paid. It's going to be a true discussion on the debt paid by Christ. Each of us, you don't want to miss tomorrow show. Let's start with our relevant Bible verse. I always want to give you a Bible verse to start our discussion. And this Bible verse comes from the book of Luke chapter 16. That reminds us of our relationship with money and possessions. It's an opportunity to be faithful stewards and honor God. So here's that Bible verse. One who is faithful in a very little is also faithful in much. And one who is dishonest in a very little is also dishonest in much. If then you have not been faithful in the unrighteous wealth. Who will entrust you to true riches.

2:55 And if you've not been faithful in that, which is another's, who will give you that, which is your own. No servant can serve two masters for either he will hate the one and love the other, or he will be devoted to the one and despise the other. You can't serve God and money. Well, my friend's that is a piercing verse, but it's a good way to start. So let's start with the basics. As an owner rental property, you're considered self-employed for tax purposes. That's when it comes to reporting your rental activities. This means your rental property is considered a business and you need to run it like a business. You're going to report your income and expenses on schedule E of your personal tax return. And the net profit or loss from the rental will flow through to your personal income tax return.

3:38 And be mixed with all your other items. Now, if you operate your rental property through an LLC or corporation, the reporting process will be a little different, but we're not going to get into that today. Maybe we'll do that in a future episode. The number one rule when managing your rental property finance is to keep business and personal expenses completely separate. You don't know how many times I've tried to unwind this. In fact, I just did a podcast episode a week or so ago about this. Mixing the two creates, accounting, headaches. Trust me. I know that. And it also raises your chances of an audit. So you want to have a dedicated checking account and credit card just for the rental to easily keep track of income and expenses. That is truly the first thing I tell people to do. So let's start with five key tips to properly account for your rental property.

4:22 The first one is pretty basic and that's track all rental income. Obviously you need to record all money received from tenants for rent. For security deposits for pet deposits or anything else they're paying you for? The IRS requires you to report all income. Even cash payments. You could do that by setting up a simple spreadsheet or you can use accounting software to carefully document every cent of rental income. One of the things that I will tell you to do is issue receipts for payments received is a smart practice, to have proof of cash transactions. So if you've got a tenant that wants to pay you in cash, One of the things you can do is issue a receipt. Now here's the key to this. You want to deposit all checks and cash received into the dedicated rental checking account in a timely manner.

5:05 Here's one thing you want to avoid, you want to avoid using rental income to pay personal expenses. And trust me, I've seen that. The next thing you want to do is deduct all allowable expenses. This is the time when you say Ralph, what are those deductible expenses? So let's talk about some of the most common rental expenses you can deduct. obviously one of the biggest ones of those is your mortgage interest. So if you've got a loan on the property, you can deduct that interest. You can also deduct the property taxes. Insurance. Management fees, maintenance and repairs. And we'll talk a little bit about repairs versus improvements later. If you have HOA fees, you can deduct those utilities. advertising cost to find tenants. And mileage and travel to manage the property. And that's one a lot of people don't know about.

5:46 So we'll dive into that a little deeper here in a few minutes, the key to all this is save receipts and track every expense in your accounting system. Allowable deductions help lower your taxable rental income. So you want to be diligent about this to capture all legitimate business expenditures. Things like renovations or property improvements. Can't be fully deducted in the year paid, but are depreciated over time. And that's where I'm going to do the sidetrack and tell you to consult with an accountant or tax pro in that area. So here's a pro tip. One of the things I definitely recommend is set up automatic bill pay from your rental checking account for any recurring expenses like mortgage taxes and insurance. You don't want this to impact your credit? Another thing you want to do is record mileage and travel expenses.

6:27 A lot of people don't know about this. Your trips to the rental property to show it to perspective tenants, to do maintenance inspect the property or collect rent can all be deducted on your taxes. But you got to make sure you track mileage. Anytime you drive for rental purposes using a log book. You can deduct each mile driven at the current IRS mileage rate. So this doesn't only include when you go to visit the property, but maybe you're going to the home, fix it center to buy things, to do repairs. All those things are deductible. In addition to that travel expenses like airfare, hotels, and meals. When you visit a rental out of town are also deductible, but the key folks, you got to keep excellent records to prove the trips were business. And not personal reasons.

7:08 If you own a rental property out of town or out of the state, you can deduct those expenses. Now, one of the things you also want to make sure of as you manage property depreciation, As I mentioned before, you cannot deduct fully major improvements repairs in a year. You paid those things. Things like putting on a new roof, remodeling a kitchen, or replacing an HVAC system. That must be depreciated over time. It's according to the IRS rules. Likewise you can Depreciate the value of your rental property itself over 27 and a half years now. That's where residential. And it goes to 39 years for commercial. So here's where I'm going to say again. Consult with a tax accountant or tax professional to establish the appropriate depreciation schedule for your rental property.

7:50 This will help maximize future deductions and properly account for major property improvements. One of the things that we need to talk about when you come in and meet with me or meet with your tax professional. If you've got to differentiate that, which is a repair and that, which is an improvement. So we go right onto the next thing. And that is hire a tax, pro. I can't stress this enough. Taxes for rental properties can get complicated quickly. Especially if you own multiple properties, so you want to work with a knowledgeable. Accountant or tax preparer experienced in rental properties. If you're looking for somebody to help you, I can help you. But the first thing I want to tell you is if you're looking for a new accountant, Ask them. Do you handle rental properties? Do you have experience with rental properties?

8:30 If they don't, they are not going to be the right person for you. A qualified tax pro can help you set up your proper accounting systems. They can help you maximize deductions, legally allowed, and most of all, avoid mistakes or misreporting to the IRS. This is an area you don't want to do it yourself. My friends don't do rental taxes unless you're a tax expert. The investment in a good accountant will pay for itself with all the deductions and savings, they are able to identify. So the truth is following these accounting best practices will keep your rental finances organized. It will simplify tax preparation, which will make me, or whoever using the do your taxes help. Very happy. And we'll help you operate your property. Like the profitable, small business.

9:11 It is. So let's explore some specific strategies and tools to make managing your books easy. And I always want to give you actionable steps. And as I've alluded to. Number one. Use accounting software. I'm a huge fan of QuickBooks online for rental property accounting. It allows you to categorize income and expenses. You can generate reports to see how you're doing. You can track your mileage. And you can also automate billing and collections. The best part of that is you can share access with your tax preparer to easy collaborate at tax time. Take advantage of technology like mobile apps to record expenses on the go. You might be out visiting the property. It's a great time to record those things. Another thing you might want to consider as hiring a property manager.

9:53 A lot of my clients do this. They will handle all the accounting for you from collecting rent to paying expenses. And the best part is those management fees are tax deductible. And as such, you outsource your bookkeeping, so you don't have to be bothered with it. It's especially helpful if you own multiple properties or don't have time to do it. Now here's another one. A lot of people don't think about and it's vitally important. You want to inspect your properties regularly? You want to make a habit to inspect all your rentals? At least once a quarter, Now I even say once a month, at least to a drive by. When you're doing that dry buy look for needed repairs for general wear and tear safety issues that need addressing et cetera, spotting problems, early saves money down the road. You also might find that your tenants skipped on you and you need to secure the property.

10:36 If you're not checking it, you're not going to know that. So definitely want to do that. Another thing you definitely want to do is educate yourself. attend real estate investing seminars, listen to podcasts like this one. Read books and network with other landlords. There's a host of information out there that you can use. You want to learn best practices on everything from accounting and taxes to maintenance, tenants, and more knowledge is vital. If this is going to be your business, you want to have knowledge of how to run it. And this one, I can't stress enough. I talk about this routinely on the personal side, and thats, maintain an emergency fund. listen folks, things will break. Tenants are going to move out unexpectedly and unexpected costs come up.

11:16 It's one of the chief complaints I hear from my clients that have rental properties. You've got to have some cash reserves on hand to tackle issues immediately without dipping into personal funds. I recommend three to six months of rental income. In a smart emergency fund. If your tenant moves out, You may have to cover that mortgage. Even though you don't have any income coming in now, remember the key is keeping excellent records, both for your own monitoring purposes and for tax reporting. By treating your rental property like a business. It is you set yourself up for success. Now, before we wrap up, let's explore some potential tax implications. When you own an investment property. Here are a few situations to be aware of. And these are things that I get asked about routinely in my practice.

12:00 If your rental income exceeds expenses for multiple years, the IRS may consider it a passive activity business, not an investment that could trigger self-employment taxes on net income. In addition to ordinary income tax, that's an area you want to discuss with your tax professional. Here's a question. I get asked quite a bit. renting your main home, fewer than 15 days per year means you don't have to report the income. Now, if you rent it longer, it may make it reportable on your tax return. So if you're renting out a room or something like that for the longterm, talk to your tax professional about that. Now here's what a lot of people may not know about. And that's depreciation deductions. Plus rental property expenses can create a paper loss for some years.

12:40 It may not be a cash loss, but when we deducted appreciation, this passive loss can only be used to offset passive income. This is what you may have heard called the passive activity loss limitations. And this is another area you want to consult with a tax pro to make sure you're handling that correctly. The IRS limits, the amount of losses you can take based on your income. Here's one a lot of people aren't aware of. If you sell your rental property, any depreciation taken over the years gets recaptured. What does recaptured mean? It means you have to look at it at the time that you sell the property. And it can be taxed at up to 25%. So this is an area you want to plan ahead to minimize taxes when selling. It makes sense to meet with a professional, have a consultation.

13:22 And see what they can do to help you get through that process of selling your rental property. The bottom line is this. Owning rental property provides great tax benefits, but also creates complexity. So, like I've said a million times already partner with someone who is knowledgeable an accountant and an educated real estate agent when buying one, managing it and selling investment properties. Now, before we wrap up, I want to remind all of our listeners to visit our podcast page. You do that at askralphpodcast.com . There you can leave us a review, share your thoughts, or even send us a message with your questions for future episodes. We would love to hear your ideas for future shows. Now, while you're there.

14:02 Make sure you join our email list to enter into our weekly $25 Amazon gift card drawing. As I've said, if you're not on the list, you can't win. If you also want to schedule a consultation, with me to discuss your specific circumstances, you can do that right on the website as well. And again, that's askralphpodcast.com/store now here's a special ask. If you know anyone who has a rental property or is considering getting into the rental property business, do me a favor and share this episode with them. This may provide some tools that they can really use to help them. So let's recap. If you own a rental property, I hope this overview on accounting tips gives you a game plan for proper bookkeeping and taxes. I want to keep you out of hot water with the IRS.

14:44 Fundamentally, it comes down to keeping detailed records of income and the allowable expenses. You don't have to overthink this folks. It's really not that hard. This will set you up for success. It'll help you maximize the deductions and most of all, avoid IRS headaches and help manage your rentals. Like to savvy entrepreneur. God called you to be, he wants you to be that steward and that savvy entrepreneur. Thanks for joining me today and being a part of the Ask Ralph podcast community. I truly do appreciate you listening. I want you to stay tuned for more practical faith focus conversations to help you master your finances. God's way. So until next time, enjoy your Saturday and stay financially savvy. And may God bless you abundantly.