Do You Need to Record Rental Expenses?
In order to claim your deductions, you must keep track of your rental expenses. Ballpark figures will not work, as you can deduct only those expenses that you actually incur. By having exact numbers with documentation to back up your claims, you will be able to prove to the IRS how much you spent in case you are audited.
To save yourself from stress next tax season, track your income and expenses as they arise. That will give you a clear picture of your rental property’s profitability, and help you claim the maximum in tax deductions. Some landlords use a paper log, others prefer Excel, and others prefer to track expenses on the go with a free mobile app like Tellus. Whatever you choose, make sure you label everything with the date and the appropriate category. For example, without a paper trail, you won’t be able to easily convince the IRS that the cleaning supplies you bought on a certain date were not for use in your home, but were used to prepare your vacant rental for an open house (and are, therefore, deductible).
If you’re using an app like Tellus, rental income is recorded automatically. Expenses can be recorded in seconds.
You can categorize every expense and search by category for easy retrieval. Here’s how to get started:
Organize expenses by category and property: You want to be able to find records easily, so label each expense with the appropriate category, for example "Repairs," “Improvements,” “Insurance,” “Mortgage Interest,” or other expense categories. This will let you see the total amount you spent per category when it’s time to do taxes. If you own multiple properties, label each expense by property to keep good records and get an accurate view of each property’s rental yield.
Make sure you record your expense receipts: Receipts are important; the IRS needs independent verification that you spent money on certain expenses in order to give you deductions. Unfortunately, receipts are also small and easy to lose. In the past, landlords would use envelopes and filing cabinets to try to keep all receipts together, but there was no automation. Using Tellus lets you record receipts as you get them. By snapping a picture of the receipt with your phone and labeling it by category, the expense is recorded and automatically appears in your cash flow statements. All files in Tellus are automatically backed up to the Cloud. This means once you’ve taken a picture of the receipt and recorded it as an expense, you can literally throw it away. Everything is always accessible when you need it.
Track your cash spending: A handful of quarters into the parking meter, a couple bucks for highway tolls, and a few more dollars for cleaning fluid—it adds up. Since your phone is always with you, you can record every cash purchase, including the amount, date, and business purpose in Tellus.
Ask service people for detailed and, in some cases, split-up invoices: An invoice that states what was done, and preferably describes it in terms of "repairing, patching, replacing," and so forth, will help show whether the expense was for a repair or an improvement. In other cases, if an electrician both repairs the wiring in your rental property and adds new wiring to a new porch on that property (an improvement), asking for separate invoices will allow you to deduct the repair for this year while depreciating the improvement cost. Invoices help in mixed-use situations, too. For example, if you are renting out one unit of the duplex you live in and a roofer redoes the shared roof, asking for separate invoices will allow you to pay one from your business account and one from your personal account.
Track use of your personal car on rental business: As a first-time landlord, you are probably not going to invest in a new business car. That will probably mean logging a lot of miles in the family car. Log the date, destination, before-and-after odometer readings, and purpose of your car trips (for example, to the rental property, the hardware store, or the bank). If you wish, you can stop doing this after 90 days (or after one week each month), call that your "sampling period," and use the results to extrapolate your rental mileage for the entire year. If a trip is for mixed purposes—for example, you drive from your home office to the dump with garbage from both your home and rental property, you can call it a business trip.
Keep business property separate or identifiable after you have bought it: Whenever you buy things with your business account—perhaps new paint, a screwdriver, or office supplies, like postage stamps and a printer and paper—keep them in a separate place, label them as business property, or do whatever else will remind you not to convert them to personal use.
Keep notes on tenant complaints: If a tenant raises an issue that leads to a repair, having a record will help establish that the work was indeed a regular operating expense, not part of a larger improvement. Accepting maintenance tickets through Tellus lets you record these repairs automatically.
Make calendar notations about your business activities: Both when you are at home and traveling for rental reasons, keeping notes regarding what you did and with whom you met will help support your expense deduction claims.
Save paperwork or record it in the app: Do not dispose correspondence (including email) related to your rental property. Hang onto relevant business cards. Agendas from seminars or conventions you attend are also valuable pieces of your paper trail if you’re ever audited. Add these documents to Tellus to cut down on your paper filing system.