Tax accounting for rental property management: What landlords should know

Note: This guide is intended to provide general information on rental property tax accounting. For specific advice on your own property or portfolio, speak with a tax professional that can examine your specific situation in detail.   

If you’re a landlord, understanding tax accounting for rental property is a surefire way to get save bookkeeping time while getting most return for your investment. Accounting takes a meticulous eye for details, so we’ve created this guide to help guide you through the process and equip you with strategies to prep your bookkeeping and tax details like a pro.

Understanding Rental Income

The first step in getting a handle on tax accounting for rental property is understanding exactly what counts as rental income and expenses. Here’s a quick breakdown of those definitions.

What Counts as Rental Income?

Rental income includes all the payments you receive from tenants. This isn’t just limited to the monthly rent; it also encompasses other payments such as advance rent, security deposits, and lease cancellation fees. Knowing what constitutes rental income is the first step in effective tax accounting for your rental property.

Reporting Rental Income

Report your rental income on your tax return for the year you actually receive it. For instance, if a tenant pays you in December for January’s rent, you report that income in the year you received the payment, which is December. Keeping track of these details helps maintain accuracy in your records.

Deductible Rental Expenses

Spotting deductible expenses takes a bit more effort. Here are examples of what qualifies, but be sure to talk to an accounting expert to make sure you’re capturing everything.

Operating Expenses

Operating expenses are the costs of maintaining and managing your rental property. These include:

• Advertising for tenants
• Property management fees
• Repairs and maintenance
• Utilities (if paid by the landlord)
• Insurance premiums

These expenses can be subtracted from your rental income, reducing your taxable income.

Depreciation

Depreciation is a tax deduction that accounts for the wear and tear on your property over time. You can depreciate the cost of your rental property (excluding land) over a period of 27.5 years. This non-cash deduction can significantly lower your taxable rental income.

Interest

Interest on loans used to purchase or improve your rental property is deductible. This includes mortgage interest and interest on credit cards for goods or services related to the rental.

Special Tax Considerations

Passive Activity Loss Rules

Rental activities are generally considered passive activities, which means you can only deduct passive losses against passive income. If your rental expenses exceed your rental income, you might not be able to deduct the excess loss against other income unless you actively participate in the rental activity.

Real Estate Professional Status

If you qualify as a real estate professional, you might be able to avoid the passive activity loss rules. To qualify, more than half of your personal services in a year must be in real property trades or businesses, and you must spend more than 750 hours in those activities.

Recordkeeping Tips

To handle taxes effectively, you’ll need to maintain accurate and detailed records of your rental income and expenses. Here are some tips:

• Keep a separate bank account for your rental property
• Save all receipts and invoices
• Use purpose-built property management accounting software
• Track mileage for travel related to your rental property

Good recordkeeping habits will make tax filing easier and can help in the event of an audit.

Read more: Why You Need Purpose-Driven Property Management Accounting Software

Filing Your Tax Return

Forms and Schedules

Report your rental income and expenses on Schedule E (Form 1040), Supplemental Income and Loss. If you have more than three rental properties, use additional Schedules E. Depreciation is reported on Form 4562.

Estimated Tax Payments

If you expect to owe at least $1,000 in tax after subtracting your withholding and refundable credits, you might need to make estimated tax payments. This is common for landlords, as rental income often isn’t subject to withholding.

Common Mistakes to Avoid

Mixing Personal and Rental Expenses

Avoid combining personal and rental property expenses. Keep them separate to avoid confusion and make it easier to check that you only deduct legitimate rental expenses.

Not Keeping Up with Tax Law Changes

Tax laws change frequently, and staying updated is important. Consider working with a tax professional to keep up with new rules and to maximize your tax benefits.

How to Make Tax Accounting for Rental Property Management Easy

Tax accounting for rental property might seem complex, but with a good understanding and the right approach, you can handle it effectively. By keeping accurate records, understanding what counts as income and deductible expenses, and staying informed about tax laws, you’ll be well on your way to managing your rental property taxes like a pro.

Consider using comprehensive property management software with built in accounting and tax tools, such as Buildium, to keep not only your tax reporting but also all your rental property records accurate and easy to access and organize—you can even give Buildium a spin with a free, 14-day trial, or by scheduling a guided demo.

Remember, the goal is to make tax accounting a seamless part of your rental property management, allowing you to focus on what you do best: providing great rental experiences for your tenants.