In this guide, we look at how to categorize expenses for your rental property and take you through all of the different expense categories.
New landlords, well-seasoned property managers, and everyone in between should understand how to categorize expenses for their rental properties. Choosing the right expense categories will save you time, stress, and money, even if the bulk of your rental property accounting is done by a CPA.
In this article, we take a look at the importance of recording expenses, what the expense categories are, and also how to track your transactions.
Although efficient rental property accounting can seem like a daunting task to the uninitiated, it is integral to the smooth running of any property portfolio.
Being organized will give you a clear picture of the financial health of your portfolio and will shed light on where you are spending or saving money. This will all contribute to your ability to successfully expand your portfolio in the future, should that be part of your strategy. Unorganized income and expense tracking, on the other hand, will be painful to sort through and a headache to deal with.
Another benefit of meticulously categorizing and recording your expenses is that it will enable you to take advantage of any deductible expenses come tax time. Incorrectly categorized expenses can lead to missed deductions, meaning you will have to pay more tax. Following the correct procedure is one of the easiest ways to reap the benefits of landlord-friendly tax breaks.
As a landlord or property manager, you may entrust a CPA to complete your real estate accounting every year. Even if this is the case, you still have a responsibility to properly record and organize your data. This way, you can help your CPA by making sure your expenses are correctly categorized from the get-go. You will make their lives easier and they will likely appreciate you for doing so. By employing a quality property management and accounting tool you can make this as easy as possible.
Lastly, efficient and accurate expense recording will give you peace of mind that everything is in order. Should you be subject to an unplanned IRS audit in the future, you can rest assured that your records are in good shape.
In the US, there are several expense categories that your transactions should be sorted into. These are as follows:
Any advertising that you have paid for to market your business should fall under the Advertising category. This applies to online, radio, and physical ads as well as hiring a marketing agency or consultant.
Whether you are deducting mileage or other vehicle expenses like registration fees and repairs, this can be recorded under the Auto and Travel category. Other travel for business-related trips such as airfares, hotels, rental cars, and meals can also be classified as such.
General maintenance of your rental properties, such as regular landscaping, pest removal, and cleaning of the building exterior, as well as cleaning the inside of the property between tenancies, should be categorized here. Note that there is a separate expense category for repairs.
If you are working with a team of other real estate professionals to who you pay commission, you should record this in the Commissions category. This will enable you to deduct commissions as a business expense come tax time.
Depreciable assets such as the property itself, equipment, or improvements are categorized as Depreciation. Familiarize yourself with what the IRS deems the useful life of each asset. For example, carpets have a lifespan of 5 years, whereas laminate or wood flooring has a lifespan of 27.5 years. Residential properties also have a depreciable life of 27.5 years.
If your rental properties are located in a community or building that has a homeowner’s association, the fees associated with this, whether they are monthly maintenance charges or one-off large expenses, should be categorized under the HOA category.
Rental property or other landlord insurance can be recorded in this section. If you do not deduct mileage and instead itemize your vehicle costs, insurance premiums on your car should also be categorized as Insurance.
Assuming your mortgage is secured by your property and not a personal loan, the mortgage interest should be categorized in this section.
Late fees incurred by tenants should be categorized separately from the main rent payments.
If you enlist the help of a CPA to complete your rental property accounting, those fees should be categorized in the Legal & other professional fees section. As the name suggests, the same also applies to any incurred legal fees.
If you do not self-manage your rental properties, you may enlist the services of a professional property manager. Any fees associated with that can be recorded here.
Mortgage interest should be recorded separately from any mortgage principal payments. This is because only the interest is deductible. Nonetheless, it is still good practice to track your mortgage payments too so that you can have a complete picture of actual cash flow and profitability.
If you have transactions that do not fit neatly into any of the other expense categories, you can file them in this ‘Other’ section. This could include your subscription to property management software.
Repairs such as fixing broken plumbing and restoring broken appliances fall under this expense category. It should be noted that for repairs to be deductible, they should be ordinary and necessary. Improvements such as upgrading the floor for the sake of aesthetics, do not count as deductible expenses.
Office supplies that you use to manage your rental property portfolio can be categorized under the Supplies section. This may include paper, ink, pens, and envelopes. Given that the category is broad, it can also be used for non-office-related expenses like a toolkit.
Any property taxes that you have paid to your local government should be included here. Payroll taxes and any other taxes related to rental property management, such as occupancy taxes, are also included.
The utilities expense category includes any utilities that you as a landlord are responsible for paying for, like electricity, gas, water, and internet, as well as phone service for your business use.
A Schedule E (part of the IRS 1040 form, which is used to record supplemental income and losses) is used for reporting income for individual properties at the end of the tax year. Instead of your rental property income and expenses being bundled together, they are divided into distinct categories. One of the most important parts of filling out a Schedule E is ensuring that the expense categories are used properly. This will ensure compliance with IRS regulations.
The Schedule E categories are largely the same as the standard expense categories, except the absence of HOA and late fee categories. Any HOA and late fees, or any other additional expenses related to the ownership, maintenance, or management of your property would be categorized in the ‘Other’ section.
If you use property management software like Landlord Studio, you will be able to instantly generate a Schedule E report, which will allow you to export all of your data in an easy-to-use format. You can then simply copy and paste the relevant information over to the IRS form.
Find out more about the Schedule E form 1040 →
Instead of tracking your expenses manually or by using a spreadsheet, make your life easier by using purpose-built property management software.
Landlord Studio allows you to track expenses against an organization, building, or unit. When you sign in to your account to add an expense, the categories are pre-loaded in the drop-down box, allowing you to easily make your selection.
Landlord Studio is available on both mobile and desktop, so you can track your income and expenses on the go. For example, if you go to the hardware to pick up some maintenance supplies, instead of waiting until you get home, you can scan your receipt at the point of sale using your smartphone. The software will then automatically digitize and store the receipt for you.
Another benefit of using rental accounting software is that you can synchronize your bank account and any relevant transactions. Instead of manually inputting income and expenses into a spreadsheet or ledger book, the hard work is done for you. You can also add historic transactions, allowing you to reconcile previous transactions with secure integration.
Find out more about real estate accounting with Landlord Studio →
Using the right software will streamline your whole rental accounting process. Additionally, it will give you access to a whole host of other features like online rent collection, tenant screening, and online rental listings. Not only will it transform your accounting methods, but it will also allow you easily scale up your portfolio as you automate various tasks such as late fees and reminder emails.
At the very least, it’s important to be familiar with the different rental property expense categories. Meticulously tracking and categorizing your expenses properly from the get-go will set you up for success come tax season. While it only rolls around once a year, keeping on top of your expense tracking throughout the year will undoubtedly save you time, money, and stress in the long run.