As an owner of rental properties, strong accounting records are in your best interest. However, they’re also expected of you by the IRS and any financial institutions to which you’re obligated. This area of property ownership holds many pitfalls for both owners and property managers. In that spirit, let’s consider a dozen tips that will help ensure that your property accounting records are accurate and in order.
Management Companies Can Manage Your Books
Responsibilities like filling vacancies, collecting rent and coordinating repairs are just the tip of the iceberg for most property managers. In fact, a top property management company in Chicago property management can handle every aspect of income property ownership, including your books. The firm you hire can at the very least inform you of what information you have to maintain, and having them oversee accounting and legal matters is an option as well.
Take Advantage of Landlord-Oriented Finance Software
If you oversee the accounting records yourself, then consider using financial software that’s tailored to the enterprise. There’s software available specifically for landlords, and the larger packages for small businesses usually have templates available that will organize your books accordingly. This step can go a long way toward ensuring that you don’t make those minor omissions that can be so common.
Keep Paper Records
Electronic records are superior because of accuracy, ease of use and ease of access, but you shouldn’t eschew paper records. Consider that the IRS advises small businesses, which you are, to maintain general ledgers and journals, year-end financial statements and tax returns and supporting documents on paper for a period of at least seven years. Mortgages and deeds should be maintained this way indefinitely, and bank statements and other important documents should be kept on paper for at least three years.
Have Leases and All Other Agreements in Writing and Signed
Leases should be formal documents that are signed and maintained with your records. Any other agreements with tenants should be signed documents as well. When you receive rent or another payment from a tenant, a receipt should be provided and a copy maintained for yourself. If you receive any correspondence from a tenant, such as text messages, maintain a record of this as well.
Cash versus the Accrual Method of Accounting
You’ll have to choose the cash or accrual method of accounting. With the cash method, you record transactions when the money changes hands, and the benefit here is simplicity. With the accrual method, transactions are recorded as they occur, and the benefit here is consistency. With the accrual method, rent for May paid in June can still be counted as May income. If you ever choose to change your approach, it’s must simpler to make this change at the start of a new fiscal year.
Have a Separate Checking Account for Rental Properties
It’s best not to mix your personal and business accounts, and almost every property management company in Chicago property management will recommend a distinct account. When you receive a rent payment, deposit it into the dedicated account, and when you pay yourself income, do so with a check written from that dedicated account.
Have Another Account for Security Deposits
Security deposits and the like must be maintained in a dedicated account not used for other purposes, but it doesn’t necessarily have to be escrow. Be mindful that if the account bears interest, tenants are entitled to that interest and can opt to put it toward the rent. If a tenant claims this interest, you are entitled to an administrative fee totaling one percent of the security deposit.
Maintain an Itemized Record of All Income from the Property
The IRS demands a disclosure of all income from rental properties whatever the basis for the collection. If you have other services on site, such as a laundromat, you have to declare that as well. For rent, a common way to do this is to maintain a rent roll, which tracks tenants, amounts paid and dates.
Maintain an Itemized Record of all Property Expenses
Taking advantage of all available deductions is an important part of success, which is why you’ll want to document expenses as part of your property accounting records. In addition to upkeep, expenses for travel, legal services, accounting and so forth are all deductible.
Track Rental Property Depreciation
You’ll also get to deduct any appreciation associated with your income properties. Income properties typically depreciate from the moment they first earn income to the moment you acquire the initial investment or choose to sell or stop using the property.
Make the Distinction between Maintenance and Capital Investments
It’s also important to make the distinction between capital investments and repairs within your property accounting records. Capital investments aren’t deductible as expenses but must instead be deducted as depreciation deductions over a recovery period determined by the enhancements made.
Maintain Supporting Documents for All Income Expenses and Depreciation
Keep your receipts for everything as part of your accounting records. As an owner of an income property, it won’t usually make sense to take standard deductions. Itemized deductions, however, will attract more scrutiny from the IRS, and you’ll want the receipts needed to support those claims.