Keeping accurate financial records is important all year long, but as tax season approaches, many real estate investors have a question: What information do you need to file taxes for rental property investments?
The IRS doesn’t require a particular recordkeeping system or method for real estate investors, but you don’t exactly get free rein either. You still have to meet the IRS’s requirements for supporting documentation. That’s why we’re covering tax prep basics today: we’ll cover the documents you need to file taxes for your investment property and why the records matter to the IRS.
Why Do Your Records Matter to the IRS?
The IRS can’t tell you how to keep your books. You get to choose what works for you.
However, the IRS cares a great deal about your actual financial records because that’s the information you use to complete your tax returns. To file taxes, you must have a summary of your business transactions for the year, as well as support for your income and expenditure figures.
If the IRS examines any of your tax returns, you must be able to produce support for the figures on your returns. You may be penalized if you fail to follow the IRS reporting requirements, report incorrect or incomplete information, or fail to file a return.
To avoid those penalties, keep your rental properties’ account books accurate and up to date with our accounting workflow tips and have the following supporting documentation on file.
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Income Records
Gross rents are the income you receive as a rental property owner. Keep any documents that show the amounts and sources of your rents. Depending on how your rental property is set up, your proof of income may include any of these documents:
- Bank deposit slips
- Electronic deposit records
- Invoices for rent
- Receipt books
- Credit card charge slips
- 1099-MISC forms
What Counts as Rental Income?
Rental income includes more than normal rent payments. Payments for canceling a lease and advance rent are also considered rental income.
So let’s say you receive the first and last months’ rent this year. Report the full amount received, even if the previous month’s rent wouldn’t apply until the lease ends the following year.
Or your tenant might cover an expense you would usually pay and then they deduct the amount from their normal rent payment. The expense paid by the tenant counts as rental income. And if you pay the utility bills for your rental property, when your renters reimburse you, that is rental income as well.
What About Services in Lieu of Rent?
If you receive property or services in lieu of rent, the fair market value of the property or services counts as reportable rental income. For example, if your tenant is a carpenter, she may offer to repair your rental property instead of paying one month’s rent. If you accept her offer, you should include the amount your tenant would have paid for the month’s rent in your rental income. You would also include that same amount as a rental expense for repairs and maintenance on your property.
Do Security Deposits Count as Rent?
Security deposits count as rental income when the tenant doesn’t live up to the lease terms, and you keep part or all of the deposit. Are you currently holding refundable deposits at the end of the lease? Those deposits don’t count as income yet.
Did you know? Revenue reporting is a common tripping point for real estate investors. Check out REI Hub’s review of the top five errors with rental property accounting to ensure your books are in order.
Expenditures
As a rental property owner, you’re no stranger to property-related outlays, the costs you incur to run your business. When you have to repair a broken window, bring in a cleaning crew, pay the insurance bill, or advertise your rental unit, keep the paperwork for those transactions.
Make sure your supporting documents list the payee, the amount paid, and the transaction date. Also, include a description of the service received or the item purchased that proves the cost was a business expense.
Keep these documents to back up your recorded expenses:
- Account statements
- Canceled checks or payment confirmations
- Cash register receipts
- Credit card receipts and statements
- Invoices
Comprehensive Documentation Is Key
Remember that one document may not provide all the required elements to substantiate an expense. You may need a combination of documents.
For example, let’s say you order a new ceiling fan for your rental property. The credit card statement will show the transaction date, the amount paid, and the merchant’s name. But the statement won’t show what you bought or how it’s related to your rental property. If you receive an order confirmation or packing slip showing the item purchased, make a note on the document showing which property it was for. Then, use the confirmation or packing slip along with your credit card statement to corroborate the expense you record in your account books.
Does Your Business Structure Affect Which Documents You Need?
How you account for and deduct travel, transportation, entertainment, and gift expenditures depends on how your rental property business is structured. But despite the deduction amount or your business structure, you still must provide supporting documentation for those expenses.
Assets
If you own rental property, you own assets. The property and equipment used in your business must be accounted for. Plus, your records must verify the information needed to calculate the depreciation of your assets each year or determine your gains or losses when you sell an asset.
The required information is typically found on real estate closing statements, purchase orders, sales invoices, or canceled checks. Make sure your records include this information:
- How the asset came into your possession
- Date of acquisition
- Purchase price
- Costs of any improvements
- Section 179 and depreciation deductions taken
- Deductions taken for casualty losses, like losses from natural disasters
- How the asset is used
- How the asset was disposed of
- Date of disposal
- Selling price and expenses
Employment Taxes
If your real estate investment business has employees, you must keep employment records for at least four years. The IRS requires you to maintain specific employment tax records, like employment tax returns, payroll tax reports, and withholding records. Your state may have additional reporting requirements, so consult with your CPA or attorney. See Employment Tax Recordkeeping and IRS Publication 15 for more information.
Ready to clean out your old files? Check out our guide on record retention to learn what to shred and what to keep.
How REI Hub Can Help
No matter your business structure, you must provide accurate financial records for your real estate investment business and have supporting documentation to back up your financial reports. But you don’t need to rely on complicated spreadsheets or outdated filing methods.
Keep your supporting documents organized and stored in a safe place, like an REI Hub account. We simplify tracking your investment property’s expenses with automatic transaction imports, built-in templates, receipt storage, and comprehensive financial reports.
Create a free trial account now to streamline your rental property bookkeeping and get ready for tax time!
