In our past blogs, we’ve talked about some of the tax deductions you can get as a landlord. But guess what? None of those tax deductions matter if you don’t have the records to claim them.
If you're considering listing a part of your residence for rent through platforms such as VRBO or Airbnb, the good news is that certain of your expenses may be deductible, including mortgage payments, cleaning fees, rental commissions, insurance, and other expenses. However, it's important to do your bookkeeping carefully to back up any deductions you claim.
To keep your finances straight, and to make sure you don’t lose any money, we’ll share a few bookkeeping principles below to keep your accounts in tip-top shape.
Records YOU HAVE to Have
If you’re like many small landlords, you probably haven’t filed to create a separate business entity to manage your properties under. So, that means there are only two basic types of records you’ll need come tax season:
- Rental income and expense records
- All the supporting documents for your income and expenses
Your income and expense record will help you determine whether or not you made a taxable profit or got hit with a deductible loss. Once you get the records, you can summarize the income and expenses on the Schedule E tax form.
All the supporting documents will serve as proof that your expenses are genuine. Items like cancelled checks, credit card records, and receipts will help you prove your deductions are legitimate if you get audited by the IRS.
Rental Property Management Software
As you invest in more properties, the traditional Excel spreadsheet or paper accounting system may become burdensome. In that case, a rental management software might be the best solution. Rental management software will expedite the accounting process. It can automatically track and input expenditures and income and generate profit and loss statements. You and your accountant can easily track your financial situation and make any needed adjustments.
You should also know that starting January 1, 2022, the American Rescue Plan Act requires services such as Airbnb to issue a 1099 form to all its property owners with annual earnings of $600 or more from bookings. The service will need your tax information to prepare needed documents.
Generating extra income from renting out a portion of your residence or a separate rental property can be an important strategy for wealth building. But whatever you do, don’t divert time or money away from bookkeeping. It’s one of the most important aspects to maintaining your rental properties, and if your books are in order, you’ll have a lot fewer headaches come tax season.