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Accounting for Your Rental Property

accounting for your rental property

No matter what stage of property investment you are currently in, understanding income and expenses for your rentals, or potential rentals, is important. After all, you probably didn’t become a landlord just for the fun of it. Proper accounting is essential to ensuring your investment pays off for you or your family. Here are some basics to understand when it comes to accounting for your rental property.

Before you buy

If you’re just getting into the market or are considering adding a property or two to an existing portfolio, one of the first things you need to do is complete a real estate pro forma. A pro forma is a document that outlines anticipated income and expenses from a specific property. It shows a potential buyer what they can expect in regards to a return on investment.

Discover more details on how to complete and use a real estate pro forma in our blog: A beginner’s guide to a real estate pro-forma. Two tips are about a pro forma tips are worth repeating here:

  1. Do not, and we can’t emphasize this enough, do not rely on a seller’s pro forma document. Many of them are openly misleading and will paint an overly rosy view of the property they want to sell.
  2. Make sure you account for ALL a property’s income and expenses (a detailed list is included in our blog). If you don’t, you won’t get an accurate picture of what to expect, and you could be in for a nasty surprise later.

Managing existing properties

First, establish separate bank accounts for your properties, even if you have just one rental home. Establishing distinct accounts for business and personal finances is the easiest way to keep everything separate and in proper order.

Next, you’ll want to look into property management software. Keeping track of expenditures and income can quickly become overwhelming, especially if you have multiple properties. Just a few years ago, it was necessary to keep track of this information by hand. Today, the reconciliation process is a lot easier.

In addition to accounting features, many property management software tools include features like online rent collection and even the ability to market vacant properties.

If you work with a property management company like Greyhaven, they’ll provide you with financial reports that will make accounting for your rental property easier.

Tax time

It’s no secret that owning rental property comes with some nice perks when tax season rolls around. Many of the repairs and improvements you make on a rental property are tax deductible, as are other big ticket items like maintenance, property taxes, and mortgage interest.

It’s important to know the difference between how to account for certain expenditures. For example, repairs and improvements will impact your taxes differently. Expenditures for repairs to maintain the basic functionality of the home are fully deductible the year they happen. Improvements that make the home more valuable must be depreciated over several years.

Related blog: Tax Tips for Landlords

Rental property owners can also depreciate the value of the property itself. This is one of the largest tax benefits available to landlords. There are some particulars to keep in mind, though, so research depreciation more fully at IRS.gov: How to Depreciate Property.

One important aspect of depreciation is called recapture. If you sell your property, the IRS will recapture some or all of the depreciation you’ve claimed over the years. If you’re only looking to rent your properties for the short or medium term, recapture is definitely something to understand more fully before you invest.

Having good accounting practices for your rental properties is a vitally important part of making sure your investment pays off. We suggest you talk to your accountant about depreciation, tax deductions for real estate investors, and other accounting concerns for your rental property.