This article has information for our Tax Modern tax prep clients on how to provide information on your rental property income and expenses.
Using Rental Management or Accounting Software
Baselane is our recommended way to track income/expenses for rental properties if a client isn’t already using some other method. You can connect it to your bank and credit card accounts, and then simply select the Category and Property for each transaction. Other options that do something similar include services such as Stessa.
Some notes on choosing categories when using Baselane or other similar software:
- It’s ok to just use the top-level expense categories (“Repairs”, “Supplies”, etc.). You don’t necessarily need to use the more specific sub-categories (“Appliance Repairs”, “HVAC Repairs”, etc.), but you can if you want.
- To keep things simple, we recommend not putting expenses in to the “Depreciation” or “Capital Expenditures” categories. Determining whether an expense needs to be capitalized/depreciated or not is a complicated subject, and we would rather make that determination rather than having you determine that while categorizing expenses. Instead, you can just put the expenses into the other expense categories such as “Repairs” or “Supplies”, and we’ll sort out which expenses may need to be capitalized.
- Add a note or memo to transactions if it may not be clear from the description what the expense was for. This is particularly useful if you have large repair expenses (over $2500), and we may need more info to be able to determine if it is a type of repair that can be expenses vs. depreciated.
To provide your income/expense info to us, if you’re using Baselane, go to “Analytics & reporting”, then go to the “Tax Package” tab and “Download Tax Package”. The “Schedule_E_Transactions” file is the one we need. If you are using Stessa or other software, it will have a similar option to download a end of year or tax report. Just be sure the report includes a list of the transactions with the category for each transaction.
Using a Spreadsheet
Using a spreadsheet to track income/expenses is usually a little more work that using rental management software because you’ll need to enter your transaction data by hand rather than importing it automatically from your bank and credit card accounts. But many people use a spreadsheet for this purpose, and it can work fine.
If you’re using a spreadsheet, what we would like you to provide is a table of the expense items or transactions. It usually works best to have a one table for each rental property. For each transaction it should include the date, amount, description, category, and an optional notes column for adding additional info. For info on recommended categories to use, see our article on rental income/expenses for a list of suggested categories to use.
When assigning categories, don’t worry about separating out expenses over $2500 that may need to be depreciated. We’ll take care of that. For example, you can put all repairs into a Repairs category, and we will check for expenses over $2500 when looking at your expenses and make determinations about which expenses may need to be depreciated. But when you have repairs over $2500, it can be helpful if you add a note to the transaction with any details about the type of repairs that were made.
Additional Tips
Here are some additional suggestions:
- When tracking income, include all money received from tenants, such as rent, late fees, cleaning fees, utilities reimbursement, etc. The only exception is refundable security deposits. Security deposit money is not reported as part of your income, unless you are keeping a portion of the deposit (to cover damages, etc.), or if you allow the security deposit to be used as the last month’s rent.
- It’s not necessary to split up mortgage payments into principal/interest/escrow portions. You can if you want for your own accounting purposes, but it’s not needed for your taxes. For mortgage interest, we’ll just use the amount reported on the 1098 form from the mortgage company instead since your reported interest expense just needs to match what is on the 1098 in any case. And for escrow, escrow payments aren’t deductible as an expense. Your property insurance is a deductible expense only when the actual insurance company payment is made (and that can be found sometimes on the 1098 statement, but otherwise it would be in your escrow reports from the mortgage company).
