October 20, 2022

For many, a rental property is the first major investment they make which they must also manage diligently. Many new real estate owners don’t move past a couple of properties, while others successfully grow their real estate portfolios into multiple individual properties. Each person has their own unique goals, and like all investments, rental property management is not for everyone. For investors who do prefer real estate as a way to build their wealth, below are some helpful tips for managing real estate accounting.

Typically, if you only have one rental property you can handle most of your accounting at year-end when you or your accountant are doing taxes. That said, as your portfolio of rental properties expands, there will be increasingly complex tax issues to consider, as well as more hands-on accounting for each unique property. While it may seem easier to group all rental costs into one bank account, this will likely create headaches down the line.

It’s worth noting that regular business expenses, tax liabilities and accounting for rental properties often span multiple years. From the time you buy the property to the time you sell it; you need to take advantage of all of the available real estate tax codes to reduce your liabilities. To accomplish this, it’s very important to keep clear records of the total money spent on each rental property separately.  Follow the steps below to keep track of each property, and you will eliminate many potential headaches for you and your tax professionals down the road.

Keep separate bank account for deposits/expenses for each property

Use a separate bank account to collect rent payments. It is unwise to let all of your tenants know your bank account number. A separate account will also let you easily track who has paid rent each month and who may still owe you money. As a general rule, you shouldn’t accept cash; but if someone needs to pay in cash, have them purchase a money order instead. As a general rule, cash is hard to track and easy to lose.

Independently track expenses for each rental property so you can properly disclose them on your tax returns. Ideally, you should maintain a separate bank account for each rental. If that’s too complicated to manage, group some properties into the same account. It’s important to keep in mind that at the end of each year, you’ll need to separate all the expenses by each property regardless of how many accounts you have set up, so it’s best to do it on the front end instead of waiting until the end of the year to divide out all of your property’s expenses.

Track improvements separately from repairs

It’s important to understand the difference between repairs versus capital improvements. This is very important because repairs are deductible when you pay for them, but improvements have to be depreciated over time. Typically, repairs won’t improve the value of your property, but rather simply bring it back to being useful. Capital improvements, on the other hand, will often increase the property value or prolong its useful life.

Don’t track depreciation

Although depreciation can be easy to calculate, don’t try to do so on your own; let your tax preparer calculate it. This is not a cash expense, so it won’t affect your bank account. The current tax code makes it simple, but if you have older properties or have made significant capital improvements, there may be other implications to consider. It’s likely best to leave depreciation calculations to a hired tax professional to handle it for you.

Simplify your accounting

Have a system for tracking income and expenses for each property. Don’t overcomplicate things.  Often times, jotting things down on a piece of paper can be just as effective as a spreadsheet or other more complicated accounting system. You are likely not tracking many transactions, so use whichever method you feel most comfortable with. The key take away here is to ensure you are tracking monthly, and don’t wait until year-end to do everything.

As you grow your rental income, you’ll likely have to expand your accounting system and it is critical to keep solid records. Accounting for your rental properties does not have to be a headache during tax season. Follow the instructions above to ensure you don’t miss any deductions and have detailed records when you eventually sell the property. No matter what system you decide to use, the main accounting objective for successful property ownership is to keep the best records possible and to keep everything organized!