In order to qualify and properly take advantage of the tax deductions available for rental properties, landlords need to keep careful and accurate records. Not doing so can result in missing out in thousands of dollars worth of deductions, which, especially in these particularly challenging times, could mean the difference between profit and loss on your rental property.
In this article we go through 5 of the common accounting mistakes we see landlords make every day and how using the right tools and software can allow you to easily resolve them.
1. No process
Running a rental is the same as running any business. And while the IRS may deem the income to be passive, as landlords we know it’s anything but passive. What this essentially means is that without time-saving and established processes in place properly operating your rental properties could take up far more of your time than you want to give.
We recognise that everyone is different, and everyone has different needs. If you have one or two properties, for example, you might find that using a spreadsheet will work fine for you. If you’re already experienced with Quickbooks then this system may work for your rental property accounts.
Generally speaking, however, good property management software will offer you all the income expense tracking tools you need as well as important time-saving features alongside to help you save time and money.
2. Not tracking expenses in real time
We see this a lot. For most people, managing your property accounts isn’t the most entertaining part of being a landlord. Because of this, landlords allow their expenses to build up into an unnecessarily large admin task at the end of the month, or worse, at the end of the year.
This means hours of sorting through receipts and scrolling through bank accounts in an effort to locate relevant expenses. Inevitably, they still end up missing expenses or recording them incorrectly. This mistake can cost landlords thousands of dollars every year and is completely avoidable with the right tools.
3. Not digitising receipts
An image we are all familiar with – the shoebox filled with receipts. The fact that this is still happening is part of the reason we made our software. The thought of filing through thousands of receipts at tax time genuinely makes us shudder in horror.
With Landlord Studio you simply snap a picture of your receipt with your phone camera and the software will read the receipt details to automatically enter them into the system. Hit save and your digital receipt is stored on our secure cloud server linked to the expense, so you don’t have to worry about it again.
4. Combining bank accounts
Landlords should keep a separate bank account for each property. Doing this means you can easily check historical income and expenses and associate them to the correct property and tenant. It also makes it a lot simpler to double check that rent has been received.
With Landlord Studio you can connect your bank accounts which allows you to access your bank feeds from inside the app and reconcile your income and expenses with a single tap.
5. Forgetting about mileage
Travel expenses related to a property can quickly add up to become a sizable deduction for landlords. In the main, this means deducting mileage for any driving done for the purposes of managing your rental property. For example, driving to the property for a routine property inspection.
It’s worth pointing out though that you cannot deduct any travel expenses to a property that are done for the purposes of improving the property. These costs, just like costs for actually making improvements for a property can’t be deducted.
To deduct driving expenses in one of two ways. Either you calculate the exact expenses or you use the standard mileage rate (check the IRS website for current rates). Either way however, you need to keep careful records of every trip you do as well as the purpose for the trip so that you can accurately apply for you tax deductions at the end of the year and so that your claim will stand up to scrutiny if the IRS check.
You can easily record your mileage you travel in our app and simply run a mileage report at the end of the year to calculate your total deduction.
Having good processes to minimize your tie input as well as understanding your tax laws and regulations is key.
Landlord Studio has additional time-saving features as well such as automated rent reminders which allows you to set email reminders to go out to your tenants a number of days before and after rent is due to ensure that the rent is paid on time and in full.
Other areas that landlords need to focus on are finding and screening great tenants to maintain high occupancy rates as well as determining the right rental price and of course, actually collecting rent.