Accounting for Landlords: How to Track Rental Income and Expenses

Track rental income and expenses by running every rent deposit and property bill through a bank account used only for the rental, and labeling each transaction with the Schedule E line it will land on at tax time. Repairs are deducted in the year you pay them, while improvements such as a new roof are depreciated over 27.5 years unless an IRS safe harbor lets you deduct them now. The work is a monthly reconciliation, quarterly estimated tax payments if you expect to owe $1,000 or more, and a year-end package that includes Forms 1099 for contractors you paid $2,000 or more in 2026.

How do you set up the books and records?

1. Open a separate checking account and a separate card for the rentals. The IRS describes the business checking account as the main source of entries in a small business's books. One account for several properties works if you tag each transaction by property, because Schedule E has a separate column for each one.
2. Keep a rent ledger for each lease: rent charged, date paid, amount paid, and any deposit held. Check your state's deposit law before you deposit one, since some states dictate the account; Massachusetts, for example, requires a separate interest-bearing account at a Massachusetts bank, beyond the reach of the landlord's creditors.
3. Keep proof for every expense. The IRS says supporting documents should show the payee, the amount, proof of payment, the date, and what was bought. An invoice plus a bank or card statement covers it.
4. Keep a fixed-asset list of the purchase price from your closing statement and each improvement, with the date it was placed in service. Depreciation is calculated from this list.

How long to keep them. The general IRS rule is 3 years after you file, or 6 years if you leave out income worth more than 25% of the gross income on your return. Records about the property itself (closing statement, improvement invoices, depreciation) are kept until the limitations period runs out for the year you sell it. For a house you own for 15 years, that means keeping the purchase file for about 18 years.

A spreadsheet can handle one or two units. Past that, software that imports bank transactions and prints a Schedule E report saves time; landlord software compared by portfolio size covers the options.

Where does each item go on Schedule E?

Individual landlords report long-term rentals on page 1 of Schedule E. Set up your categories to match its lines so year-end totals drop straight onto the form.

Income (line 3, rents received). Under Publication 527, rental income includes:

• Regular rent, plus advance rent in the year you receive it, even if it covers next year.
• A payment from a tenant to cancel a lease.
• Bills a tenant pays on your behalf, such as a water bill deducted from rent.
• The fair market value of services a tenant provides in place of rent.
• Any part of a security deposit you keep. A deposit you plan to return is not income when you receive it.

Expenses (lines 5 to 19):

Three rules catch new landlords. Mortgage principal is never deductible. If you use the cash method, you cannot deduct rent a tenant failed to pay, because it was never counted as income. If you or your family use the property personally, line 2 asks for fair rental days and personal use days, and expenses for the personal days are not rental expenses.

For mileage on line 6, the 2026 IRS standard rate is 72.5 cents a mile for driving from January 1 to June 30 and 76 cents a mile from July 1 to December 31. Publication 527 treats driving between your home and a rental as nondeductible commuting unless your home is your principal place of business. Log each trip's date, purpose, and miles as you go.

Is it a repair or an improvement?

The IRS treats a cost as an improvement if it is a betterment (fixes a material defect that existed when you bought the property, enlarges it, or materially increases its capacity or quality), a restoration (replaces a major component or a substantial structural part), or an adaptation to a new use. Improvements are capitalized and depreciated. A repair keeps the property in ordinarily efficient operating condition and is deducted on line 14 in the year paid. The Schedule E instructions give fixing a broken lock or painting a room as repairs, and replacing an entire HVAC system or adding substantial insulation as improvements.

Residential rental buildings and their improvements are depreciated straight-line over 27.5 years using a mid-month convention, which treats the item as placed in service halfway through the month. Land is never depreciated.

Worked example. A $12,000 roof replacement placed in service in July 2026 is depreciated at $12,000 / 27.5 = $436.36 a year. The mid-month convention counts 5.5 months in 2026, so the first-year deduction is $436.36 x 5.5 / 12 = $200. Treated as a repair, the full $12,000 would come off 2026 income. How rental property depreciation works covers basis, the land split, and recapture when you sell.

Three safe harbors that let you deduct now

The de minimis and small taxpayer safe harbors work only if you elect them each year by attaching a statement to a timely filed return, including extensions. The de minimis rule also requires that, from the start of the year, you have a practice of expensing items under the limit in your books. The de minimis statement is titled "Section 1.263(a)-1(f) de minimis safe harbor election." The routine maintenance safe harbor needs no election.

What do you do each month, quarter, and year?

Monthly:

• Match rent received against each lease ledger and follow up on any shortfall.
• Categorize every bank and card transaction by property and Schedule E line, and attach the receipt.
• Reconcile the account so your books match the bank statement to the cent.
• Move any capital purchase onto the fixed-asset list.
• Review the operating numbers in property management metrics for landlords, such as collection rate and expense ratio.

Quarterly: estimated tax. Rent has no withholding. You generally must pay estimated tax if you expect to owe at least $1,000 for the year after withholding and credits, and your withholding and credits will be less than the smaller of 90% of this year's tax or 100% of last year's (110% if last year's adjusted gross income was over $150,000). The 2026 due dates are April 15, June 15, and September 15, 2026, and January 15, 2027. Raising the withholding on your W-4 at a job can replace the payments. How quarterly estimated taxes work for landlords shows how to size each payment.

Year-end:

1. Forms 1099. Get a Form W-9 from each contractor before you pay them. If your rental is a trade or business, file Form 1099-NEC for each unincorporated contractor you paid $2,000 or more for services in 2026, up from $600 for payments made through 2025. Count checks, cash, and bank transfers; payments by credit card or through a payment network that issues Form 1099-K are reported by that company instead. Payments to attorneys are reported even when the law firm is a corporation. The IRS deadline, for filing and for sending the recipient's copy, is January 31, which moves to February 1, 2027 for 2026 payments because January 31 falls on a Sunday. Schedule E asks at the top whether you made payments that required a 1099 and whether you filed them, so settle with your preparer whether your rental counts as a trade or business.
2. Gather the package: profit and loss by property, Form 1098 for each mortgage, property tax and insurance bills, the fixed-asset list, mileage log, and any safe harbor statements.

A property manager's monthly owner statement covers the rent and bills it handles, but you still keep the fixed-asset list and the year-end package. Self-managing vs hiring a property manager compares the cost and the work.