The Complete Guide: How To Categorize Rental Property Expenses

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.

Accurately recording rental property expenses

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 rental property 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 and file your taxes 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.

By employing a quality property management and accounting tool you can make your rental property expense tracking 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.

Summary: Why detailed rental property expense records are important

1. Make filing your taxes easier, faster and more accurate.
2. Capture every tax deduction and reduce your taxes.
3. Plan for the future with better financial data.
4. Avoid IRS audits and potential additional taxes and penalties.

What records should you keep track of?

Everything. That’s the short answer anyway.

The IRS is known for auditing small companies — and ignorance is not an excuse for mistakes. If you show losses for consecutive years you’re more likely to draw the attention of the IRS. Additionally, not all auditing agents are fully aware of all the nuances surrounding real estate tax laws, which could mean they’re more likely to question particulars in your claims than they are for a regular business.

To be on the safe side, you should have accessible records of everything.

Permanent records

Landlords don’t just need to keep track of expense receipts and rental income: there are also several documents you need to file and keep indefinitely. A few examples of these documents are:

• Your current and past tenant leases.
• Records of all communications between yourself and your tenants.
• Legal documents such as fines, inspection reports, and court appearances.
• Records if you have incorporated your rentals as an LLC (or other).
• Your insurance policies.
• Loan documents such as mortgages.
• Past years’ taxes.
• Property title/deed.

You can store all these documents as secure digital records in the Landlord Studio rent tracker app. This will allow you to do away with the endless filing cabinets and shoeboxes of receipts. Instead, everything will be neatly organized inside the app according to organization, property, and lease.

What are the rental property expense categories?

In the US, there are several expense categories that your transactions should be sorted into. These are as follows:

Advertising

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.

Auto and travel

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.

Cleaning and maintenance

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.

Commissions

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.

Depreciation

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.

HOA

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.

Insurance

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.

Interest

Assuming your mortgage is secured by your property and not a personal loan, the mortgage interest should be categorized in this section.

Late fees

Late fees incurred by tenants should be categorized separately from the main rent payments.

Legal & other professional fees

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.

Management 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

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.

Other

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

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.

Supplies

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.

Taxes

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.

Utilities

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.

Learn more about the Schedule E expense categories here →

How to report rental property expenses on a Schedule E

The Schedule E form (part of the IRS 1040 form), 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.

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-read format. You can then simply copy the relevant information over to the IRS form.

How to calculate your total deductible rental property expenses

Whether you already own a rental property or are just considering an investment, understanding and calculating deductible expenses is crucial for maximizing your profits and minimizing tax liabilities.

If You Already Own the Property: Utilize Your Profit & Loss Statement

Accurate records are essential. Your Profit & Loss (P&L) statement summarizes income, expenses, and net profit over time, helping you identify deductible expenses.

Using a tool like Landlord Studio can make tracking finances seamless, providing accurate data and highlighting tax-saving opportunities. Then, at the end month, quarter, or year you can instantly generate your P&L with a few quick clicks.

When reviewing your P&L:

• Break down expenses by vendor or category to maximize deductions.
• Identify recurring expenses to ensure they’re accurately categorized.

If You’re Considering Purchasing a Property: Estimating Rental Property Expenses

Getting a realistic estimate of deductible expenses before buying can help you budget and project returns. Here’s how:

1. Consult Local Property Managers: Managers can provide insights into typical local expenses—such as taxes, insurance, and maintenance—helping you gauge expected costs.
2. Network with Real Estate Investors: Connect with local investors to compare costs and uncover deductible expenses in your market.
3. Contact Utility Companies: Utility costs vary widely. Contact providers to estimate costs and explore competitive rates to optimize future deductions.

IRS tips for rental property expenses

The IRS provides essential guidance on managing rental property expenses for tax purposes. Here are some key tips:

• Deductible Expenses: You can deduct rental expenses like mortgage interest, property taxes, operating expenses, depreciation, and repairs to reduce your taxable income from rental properties.
• Improvement Costs: Costs for improvements are capital expenditures and are not fully deductible in the year they’re incurred. Instead, they must be depreciated over time.
• Reporting Income and Expenses: Report your rental income and expenses on Form 1040, Schedule E, Part I. If you have more than three rental properties, attach additional Schedule E forms as needed.
• ‍Record Keeping: Good records are essential. They track property performance, help prepare financial statements, identify income sources, organize deductible expenses, and serve as proof if you’re audited.

What to look for in an income and expense tracker

As part of our mission to improve the lives of landlords and tenants through innovation, we have optimized the rental tracking feature in Landlord Studio based on user feedback.

Our landlord app makes it easier than ever to not only store relevant documents and record your rental income but also to organize all your deductibles. You can connect your bank account to view and reconcile expenses with a few quick taps, set recurring expenses, create rent reminder emails, and instantly generate professional reports from any device.

Do away with your Excel spreadsheets and boxes of receipts. Let Landlord Studio look after all your rental tracking needs.

Smart Scan Receipts: Smart scan receipts allow you to take a picture of your receipts using your phone. The app then reads the receipt details and enters them automatically into the system.

Bank reconciliation: Connect your bank accounts to your Landlord Studio account to view and reconcile transaction in real-time. Set up rules and utilize our auto-matching feature for fast and accurate accounting.

Track expenses on the go: Log your expenses on any device as they happen. Enter them manually, reconcile from your bank feed, and scan receipts.

Recurring Expenses: Create recurring expenses for regular payments and reduce manual data entry.

Tenant payable expenses: Not all property expenses are the landlord’s responsibility; mark tenant payable expenses to ensure your books stay balanced.

Financial reporting: Your income and expense tracking is only as good as the reports you can generate. With Landlord Studio instantly generate any of over 15 customizable reports including:

• Income Expense Report
• Rent Ledger
• Schedule E Report

Tracking rental property expenses with Landlord Studio

Instead of tracking your expenses manually on paper or with spreadsheets, simplify your rental property accounting with purpose-built property management software.

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.

Landlord Studio allows you to track expenses against an organization, building, or unit. The rental property expense categories are in line with IRS requirements, and our powerful automation and reporting will help you maximize your end of year deductions and increase your portfolio ROI.

Find out more about real estate accounting with Landlord Studio →

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.

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