Rental Property Accounting Guide

Accounting for rental property means tracking and analyzing the financial activity of real estate investments. It’s a branch of business accounting with its own rules and routines. While it can feel intimidating, it’s essential to running a stable, profitable rental business.

Are you new to the rental market or looking to invest? Starting with a strong financial foundation gives you an edge, whether you’re trying to secure funding, set your rent rates, or maximize your tax deductions.

Today, our team at TurboTenant will break down common questions and key elements of rental property accounting so you can confidently manage your finances.

Why is rental property accounting important?

Rental property accounting is essential because it helps landlords with compliance, money management, and performance analysis.

Keeping organized, accurate account books is crucial for complying with tax laws. Clear accounting practices and books also help you:

• improve cash flow management,
• increase income,
• increase tax savings,
• lower expenses,
• maximize return on investment, and
• simplify your tax prep.

When businesses use outdated or irregular accounting practices or manage money poorly, they risk overpaying taxes, losing rental income, incurring higher expenses, and lowering their ROI.

In short, your books are an essential piece of your investment property. Getting the books right matters—and affects every aspect of your business.

Not a business or accounting major? Not a problem. By incorporating the following tactics into your rental property business, you’ll be able to handle the bookkeeping for your rentals like a pro.

Structure is Key

Start with a firm foundation for your books by getting the structural elements of your business in place first.

Decide on a business structure: The type of entity you form (LLC, S corp., sole proprietor, etc.) affects which tax forms you’ll need to complete, how your assets are protected, and what management responsibilities you’ll have.

Get your financial accounts ready: Open at least three accounts: checking, savings, and a credit card, all dedicated to the investment property. Depending on your location, you may also need to keep security deposits in a separate account.

Test and choose an accounting system: Whether you use bookkeeping software or templates, get familiar with your accounting system before you’re busy with property searches, renovations, or new tenants.

Choose your storage method: Decide now if you’ll use physical or digital document storage, then get your equipment and naming conventions in place to support that choice. Ensure you have a fire- and waterproof safe for critical physical documentation.

Build your support team: Eventually, you’ll have questions about your books or transactions and need help. Establish relationships early on with your banker, lawyer, tax accountant, realtor, and property manager, so you’ll be ready when those questions come up.

Having these structural elements in place before your rental activity takes off will save you time and frustration when working on your books (and come tax season).

Bookkeeping Essentials for Rental Property Owners

Once your business structure is in place, you can focus on setting up your books. How you organize your recordkeeping system can save you time—if you put some thought into its arrangement from the start.

The goal is to organize your books in a way that will help you save money and use your time efficiently, without undue stress. Your recordkeeping system should also be ready to scale alongside your portfolio’s growth. These essential bookkeeping tips will help set up your recordkeeping for success.

Which accounting method is best?

In real estate accounting, we have two methods for bookkeeping: cash or accrual.

In cash-basis accounting, we record transactions when we send or receive funds. Many sole proprietors use this method.

Accrual-based accounting records a transaction when it occurs, regardless of when we send or receive funds. This method is more complex than cash accounting but gives a more accurate financial picture.

Not sure which method to use? Talk with your tax accountant to determine the best method for your situation.

What is a chart of accounts?

A chart of accounts is the complete list of the accounts in your business’s general ledger. The accounts are divided by category: assets, liabilities, revenue, expenses, and equity. Every transaction will fall into one of these five areas. You can add a sub-account when you need more detail on your costs.

A streamlined chart of accounts is best; you don’t need separate subcategories for each vendor. Think about which deduction categories you’ll need to report on your tax forms, then use those for your subaccounts to make tax prep easier. Many real estate investors use Schedule E as the model for their charts of accounts.

What counts as rental income?

Many investors think rent is the only type of revenue they need to report for their rental properties. But rental income includes more than just monthly rent. Revenue also includes these payments:

• Advance rent payments
• Amenity fees, like laundry or equipment rental
• Late fees
• Lease cancellation fees
• Parking fees
• Payments made by tenants on the landlord’s behalf
• Pet fees
• Rent
• Security deposits withheld
• Services or goods received in lieu of rent

Breaking your income down into subcategories within your chart of accounts will help you identify where your revenue is coming from. Just remember to record and report your income.

What’s the difference between improvements and deductible expenses?

A capital improvement, also known as a capital expenditure or fixed asset, is a purchase made to acquire or improve an asset. These purchases aren’t immediately deductible. Instead, we add their cost to the property’s basis and then depreciate it, which helps reduce your annual tax liability and capital gains when you sell the property.

Think about replacing a roof, upgrading to energy-efficient windows, remodeling a kitchen, or installing a new HVAC system. These are capital improvements.

A deductible expense is an item you can immediately subtract from your taxable income, lowering your tax liability. Although the IRS doesn’t view all purchases as expenses, your rental property’s ordinary and necessary expenses, like these, are deductible:

• Advertising
• Contractor payments
• Depreciation
• Insurance
• Legal fees
• Maintenance and repair costs
• Mileage
• Mortgage interest payments
• Supplies and equipment
• Tax prep and accounting costs
• Utilities

For example, replacing a few missing shingles, repairing a broken window, fixing a leaky faucet, or performing routine maintenance on an HVAC system count as deductible expenses.

Rental Property Accounting Best Practices

Your business structure and books are in place. Now what? Follow these accounting best practices to make the most of your account books.

Schedule Time to Manage Finances

Updating your books once a year isn’t enough. Get in the habit of working on your books each month, at a minimum. Weekly account updates are even better, especially as your activity and portfolio grows. If you use accounting software that has an app, record transactions as they occur.

Dedicate time each week to record income, pay bills, review reports, and check for upcoming filing or payment deadlines.

Pro tip: Block time off on your calendar with recurring appointments for accounting. Those calendar blocks will remind you to update your books and keep you from scheduling other appointments during your bookkeeping time.

Understand Key Metrics and Reports

From a performance standpoint, the account books for your rental property should help you answer two questions:

1. Where is the money going?
2. How is the investment property performing?

Financial reports and metrics can help you answer those questions, giving insight into your business’s health. Then you can make informed decisions to get the best performance possible from your investment property.

You also need reports to get loans or funding from investors, complete tax returns, and find areas of improvement, whether at the property or management level. Get familiar with these key reports and metrics:

• Balance sheet: Summarizes your business’s assets, liabilities, and equity at a point
• Cap rate: Measures a property’s potential return on investment
• Cash flow: Shows the movement of cash to and from the business, showing liquid assets
• Cash-on-cash return: Calculates annual cash flow generated by the property as a percentage of the initial cash investment
• Net operating income: Shows the property’s profitability and its ability to cover mortgage payments
• Profit and loss: Reports income, expenses, and profit over a specific period
• ROI: Measures the profitability of the investment relative to its cost

Remember, an annual or quarterly review isn’t enough. Monthly reviews help you catch missing bills, trends, and budget variances, plus you can adjust rent rates or plan for refinancing.

Know Your Tax Obligations

Keeping your own books isn’t the same as filing your own taxes. And, chances are, you’re not an accountant or tax lawyer, so you’re probably not familiar with all the potential forms, taxes, and deadlines related to rental property accounting. That’s why doing your research is crucial.

Even if you plan on completing and filing your taxes yourself, talk with your CPA and lawyer about your tax and legal obligations. Understanding the requirements for your rental business upfront will help you avoid surprise taxes, interest, and penalties. Your business structure, location, lease types, and service offerings affect which taxes you’re subject to.

A CPA or tax preparer can confirm which tax forms you’ll need so that you can get familiar with the required documents and deadlines—before tax time.

Pro tip: Don’t wait until February or March to schedule a visit with a CPA, especially if you’re a new client. You’ll receive faster responses and have an easier time scheduling appointments during the third or fourth quarter.

How TurboTenant Can Help

Organized, accurate books are critical to your rental property business, but you’re not an accounting expert. We understand, and we’re here to help!

TurboTenant is property management software with an accounting platform explicitly designed for landlords. We make real estate accounting easier, more efficient, and less stressful for rental property owners.

Our streamlined, affordable bookkeeping software includes all the essential accounting features you need to keep your books and finances in shape; no business or accounting degrees required.

Fast, Simple Setup

Skip the hassle of setting up spreadsheets, updating templates, or figuring out complicated, generic accounting software. TurboTenant’s accounting platform is ready right from the start with a customizable chart of pre-configured accounts for rental properties.

Automations, Templates, and Options for Accurate, Efficient Bookkeeping

With TurboTenant, you can save time without sacrificing accuracy.

• Secure linked accounts and data imports from your bank replace manual entry and prevent errors.
• Matching rules and recurring transactions help you efficiently record transactions.
• Automated mortgage accounting and loan payment templates ensure you capture deductible interest.
• Integrated lease tracking helps you keep up with key dates, tenants, and lease terms.
• Double-entry accounting and bank reconciliations ensure that every transaction is accounted for and balanced.

Plus, TurboTenant includes an option for bookkeeper and CPA access, making it easy to ask your accountant about a transaction or to hand over your books during tax season.

Transparent Reporting at Every Level

TurboTenant’s multi-level reporting gives you clear data at the unit, property, and portfolio levels with essential, accountant-approved financial reports available on demand.

We go beyond the standard reports like balance sheets, cash flow, and profit and loss. Use our real estate performance reports like cash-on-cash, net operating income, and operating expense ratio to ensure your investments perform at their best.

On-Demand Tax Prep and Support

turbotMake tax season a breeze with TurboTenant’s built-in tax support features.

• The Tax Review: Quickly double-check your books for the most easily missed deductions.
• The Tax Packet: Gather the most relevant reports, including Schedule E, for your tax preparer.
• Asset and depreciation schedules: Monitor and record crucial depreciation deductions.
• Mileage tracking: Record and export your mileage information to maximize your deductions.
• Digital storage: Keep your supporting documentation organized and linked to the related property or transaction.

Give your real estate investment a strong accounting foundation. Sign up for a TurboTenant account today!