Tracking Rental Income/Expenses

Income

You just need a total of the rental income for each property for the year. The income is reported in the year it is received, regardless of whether the money is for rent for a previous year, or future years.

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.

Expenses

Expenses are reported in the year they are paid, regardless of whether the money is for rent for a previous or future tax year. If your mortgage company uses an escrow account to pay your property taxes and/or insurance, those expenses are deductible when the mortgage company makes those payments on your behalf (not when they are paid into escrow). If you have expenses that cover a period of time more than 1 year into the future (which is rare), then you can only deduct the portion that applies to the current year.

Expenses have to be reported on your tax forms in separate categories on your Schedule E (or form 8825 if it’s a partnership). Placing expenses in the wrong category doesn’t impact your total tax bill, but it’s a good idea to use the correct categories to avoid raising any red flags with the IRS that could result in an audit.

These are the categories of expenses listed on the Schedule E:

• Advertising: Money spent on advertising, such as fees to list your rental on a rental listing website.
• Auto and travel: See our article on auto expenses. If your rental is out of town, you may also have other travel expenses, such as airfare.
• Cleaning and maintenance: Cleaning fees, lawn care, pest control, and other regular/routine maintenance costs (not improvements to the property, just expenses to maintain it).
• Commissions: Commissions paid if you use a real estate agent to list your property to find tenants (not for buying/selling the property). Airbnb service fees can be included here.
• Insurance: Homeowners insurance and mortgage insurance (PMI) for the property.
• Legal and other professional fees: Legal fees related to tenant issues, and tax prep fees (for the portion of your taxes that were related to this property).
• Management fees: Property management fees.
• Mortgage interest: Report interest for loans used to buy or improve the property. It may be best to use this category only if you received a 1098 form, otherwise, report it under “other interest” instead. Cash-out refi and HELOC interest is only deductible as an expense if the money was used for the rental property.
• Other interest: Credit card interest, or other interest for items used for expenses for the property. Or mortgage interest that wasn’t reported on a form 1098.
• Repairs: Materials and labor costs to repair broken or worn out items of the property. Expenses that improve the property aren’t included in repairs. Improvements generally have to be depreciated (see depreciation below). But small improvements under $2,500 can be listed as an expense (if you make the “de minimis safe harbor” election on your tax return).
• Supplies: Items for the property that get used up, including office supplies, trash bags, toilet paper, A/C filters, etc.
• Taxes: Property taxes, or other local taxes and licensing fees.
• Utilities: Electricity, internet, trash, etc. If you pay the bill, but the tenant reimburses you, then report the expense here and their reimbursement is reported as part of your income.
• Depreciation: See our article on depreciation.

There is also an “other” box where you can list other expenses, including items such as these:

• Cell phone: You can deduct a portion of your cell phone bill based on how much of your cell phone use is related to the rental property. Be prepared to show phone records and documentation to substantiate that if requested by the IRS. (It may be worth claiming this as an expense if you don’t want to deal with the potential hassle of having to show documentation for it.)
• Education: You can deduct education expenses if it is something that is genuinely useful for maintaining or improving your skills needed for the rental. You can’t deduct education expenses that occurred before your rental property activity.
• Furniture: Furniture purchases under $2,500 can be listed as an expense (if you make the “de minimis safe harbor” election on your tax return). Larger furniture purchases would need to be depreciated.
• HOA: If you have HOA fees, those are often listed in the “other” expenses.
• Home office: If you have a home office, it has to be a portion of your house that is used exclusively for business use, which in this case would be managing your rental properties. It’s easiest to use the “simplified” home office method, which gives you $5 of deductible expense per square foot, up to 300 square feet. But the home office deduction can’t be used to generate a tax loss if you don’t have taxable income, so it’s often not useful for rental properties, which are often operating at a taxable loss already.

You can’t estimate your income or expenses. You have to use the actual exact cost. Using round numbers that appear to be estimates can be a red flag for the IRS that you’re not reporting accurate information.

If your rental property is a portion of your home (such as a duplex, or if you’re renting rooms to roommates), you’ll need to proportion the expenses between the personal portions and the rental portions that can be listed as an expense.

If you pay expenses to any service provider more than $600 during the year, and they aren’t a corporation, and you didn’t pay with a credit card or Venmo/PayPal/etc, you may be required to send 1099-NEC forms at the end of the year. See our article on 1099-NEC requirements.

Software/Services for Income/Expense Tracking

You can just add up your income and expenses with a spreadsheet. But it’s easier to manage if you use software that connects to your bank and credit card and syncs the transactions for you.

For most rental property businesses, the software doesn’t need to do anything very fancy, but it does need to have the ability to download transactions from your banks and credit cards, let you set categories for the transactions, and then let you see totals for the categories for the year. It’s convenient to combine financial tracking with rent collection and general rental property management.

Real Estate Rental-specific software (it you want software that doesn’t just track finances, but can also be used to help you manage your rental properties):

• Stessa: ($0-$35/month) If you’re looking for something that is specifically designed to track rental real estate, and also do rent collection, online lease signing, etc., then Stessa is a good option to try. Their rent collection requires that you use their integrated bank account (but you can withdraw funds to your regular bank account).
• Baselane: ($0/month, $2 rent collection ACH fee) This is a new one that is free for tracking income/expenses, rent collection, etc. It has a nice modern design and is very easy to use. It doesn’t currently have built-in lease signing (we recommend using RabbitSign for lease signing). You can have rent payments deposit directly into your own bank account. Baselane is my current top choice, and it’s what I use for my own rental properties. One minor annoyance with Baselane is it currently makes you verify every login with a text message verification, but you can contact them and ask them to disable that.

Personal finance software (easy to learn and use, and suitable for most rentals that aren’t owned by a partnership):

• Simplifi: ($3/month) This is a good option for simply tracking your income/expenses for rental properties, as well as keeping track of your personal finances. It’s inexpensive and easy to use.
• Quicken Classic: ($7/month) If you prefer desktop software (downloaded and installed software) rather than a cloud-based serviced, then Quicken is a good option for that.

Business accounting software (recommended for rentals owned by a partnership, or for people who want the advanced accounting features):

• QuickBooks Online (QBO): ($30-$90/month) QBO is the most expensive option, but it is also the most full-featured option. You can easily share your books with your accountant. “Essentials” is adequate if you have one rental property, but you’ll want to get the “Plus” subscription if you have multiple properties.
• Wave: ($0) Wave is similar to QBO, but with fewer features. It’s free to use for the features you would need for rental properties. It’s fairly easy to use, and it has the option to share your account info with your accountant.