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Last year has come and gone, but 2019 could still come back to haunt you during tax season if you’re like most DIY landlords and have been too busy managing your rental to metaphorically “put your house in order.”
The biggest benefit of owning a rental property is the deductible expenses, but if the IRS doesn’t recognize your expenses as work-related, it can be a financial headache. Luckily there are a couple of very easy things you can do to make sure you’re claiming all the deductions available.
Get The Receipts
When it comes to tax deductions for rental properties, the burden of proof is on you and knowing exactly what you need in order to claim something as an expense becomes very important. Keeping track of receipts, canceled checks and bills is great — but if you aren’t able to show how it was used at the specific rental property, then it was in vain. Something as simple as a Home Depot receipt could be called into question if it’s not thoroughly journaled because the proof of showing that it wasn’t a personal expense can be questioned.
Once you file your taxes, you can’t go back and get receipts or assign old receipts to previous expenses even though it may have been used for the rental. For example, an Amazon purchase for an expense that wasn’t assigned to a specific rental expense is no longer considered a deductible expense.
Lost your receipts somewhere in the junk drawer? As long as you keep track of the expense and how you used it, you may still be OK. That’s thanks to the Cohan Rule, which allows you to claim deductions without having any receipts but does require keeping a detailed financial journal. The specific requirement is known as contemporaneous records.
Maintain Digital Records
The best gift you can give yourself during tax time is the gift of digital record keeping. In 1997, the IRS announced that digital records of receipts can be used as supporting evidence if you’re audited. There are a lot of options for free rental accounting software, so there’s really no excuse for landlords not to be using it.
Keeping deeds, loan documents, closing documents, permits, contractor bids, leases, tenant applications and other long-term receipts is just as important as the short-term receipts in the event of an audit. Digitally storing all your rental documents in an easy-to-access place will be invaluable if you ever need to dig them out and prove that all your deductions are legitimate.
Be Thorough With Your Schedule E
Most landlords use the cash basis method, which means that all rental payments count as income (versus the accrual method, where you tally up losses/gains) and that total income needs to be reported. Any deposits collected during the year also need to be counted as income if any part is nonrefundable or you’re planning on using the security deposit as a final rent payment.
If tenants deposit money directly to your bank account or pay for rent in cash, you could run into issues providing the right documentation to prove your rental income amount. I recommend using an online payment collection tool with accounting software to provide a receipt to the tenant, while also maintaining a proper record of the funds and what property it was connected to.
Things can get confusing once you start adding rental properties to your portfolio, but again, online accounting software can make figuring out your schedule E and attaching it to your 1040 much easier.
The benefits of having a rental property are great, but we have to make sure we can utilize them. Keeping track of your income and expenses is key, and my best advice is to research and utilize accounting tools made for landlords to help you stay organized.