You’ve put in the sweat equity to make your rental property a reliable source of revenue. But to properly take care of your investment, you need an accounting system.
Good property management accounting lets you see how much profit each property is making. It allows you to accurately record your expenses, so you can make the most of tax deductions. And it makes it easy to report income and expenses separately for each property—something the IRS requires you to do.
Here’s how to get your property management accounting off the ground.
Step 1: Open separate business accounts
No matter the size of your rental property, you need to treat it as a business. That means separating your personal and business finances by opening a business checking account.
All income from the property goes into that account, and all expenses should be paid for from the account. If you have multiple properties, you may want to consider opening a separate account for each. This will make it easier to track your finances.
Step 2: Choose your accounting method
There are two methods for tracking the money that enters and leaves your property management business: cash basis, and accrual.
With the accrual method, you enter income or expenses as they happen. It doesn’t matter whether you have the money in your account yet, or you’re still waiting on a bank transfer.
This is most important when it comes to rent. Suppose you own a summer cottage. Your tenant pays you up front for four months’ worth of rent, to be tracked monthly, totalling $8,000. Under the accrual method, even if you have the $8,000 in your bank account, you would only enter $2,000 per month on the books.
With cash basis, transactions are entered on the books as soon as money changes hands.
Using the summer cottage rental example, as soon as your tenant paid you the $8,000 in advance, you’d enter that amount as business income.
The accounting method you choose will depend on how you’re most comfortable tracking and reporting income. However, cash basis is the most popular method for small businesses.
Step 3: Set up a chart of accounts
Your chart of accounts is like a cheat sheet for doing your books. Whenever you enter a transaction for your rental, you reference the chart of accounts.
It lists every account, or ledger, that a transaction can be sorted into. And it lets you know whether that account is for expenses (money leaving your business) or income (money entering it).
The more detailed your chart of accounts—that is, the more accounts you have—the more insight you’ll have into how money enters or leaves your business. The trade-off is that your books will be more complex.
Your chart accounts can take the form of a spreadsheet, or even a text document. If you use accounting software, it will exist as a separate section or tab.
Here’s an example of a relatively simple chart of accounts. Suppose you’re listing your laneway house on Airbnb:
CHART OF ACCOUNTS - LANEWAY Airbnb
|Account||Type||Types of transactions|
|Utilities||Expense||Heat, water, electricity|
|Repairs||Expense||Repair supplies, repair services|
|Grounds maintenance||Expense||Flower beds and lawn care|
|Rent||Income||Guest fees, after 3% service charge|
|Suite supplies||Expense||Toiletries, basic kitchen stuff, etc.|
|Cleaning||Expense||Cleaning supplies costs|
That’s one version. If you wanted to go into more detail, though, your chart of accounts could be longer. For instance, instead of “Utilities,” you may have separate accounts for heat, water, and electricity.
Step 4: Set up your journal
At the heart of your accounting system is your journal. This is where you track transactions as they occur. It’s smart to organize your journal by month. For instance, if you’re doing your bookkeeping in Excel, you might have a separate sheet for each month of the journal.
Keep in mind, this is for a single-entry bookkeeping. Single-entry is an accounting style that’s suited to fairly simple businesses—such as the laneway AirBnB rental.
If you have multiple properties bringing in money, you’re probably better off with a double-entry bookkeeping system. It takes more work to maintain, but it’s better for organizing lots of different transactions and ledgers. If you’re interested, we’ve got a simple guide to double-entry accounting to help you get started.
For the sake of simplicity, though, we’ll use a single-entry system for our example. Here’s what the month of April might look like for your laneway AirBnB:
JOURNAL — LANEWAY Airbnb — APRIL
|01/04/19||Rent||$300||Guest April 1 - 6|
|07/04/19||Suite Supplies||$10||Soap and candles|
|09/04/19||Rent||$150||Guest April 9 - 12|
|21/04/19||Rent||$250||Guest April 21 - 26|
To track how much money you made and how much you spent, you generate an income statement—one of the three main types of financial statements.
Step 5: Generate financial statements
When you generate financial statements, you take the information from your journal (or general ledger if you use double-entry), and use it to create reports that rack how your business is performing. They’re essential for long-term strategy, and make it much easier to file your taxes at the end of the year.
There are three key financial statements you should be familiar with:
The balance sheet lets you track your current assets and liabilities—how much money you have to work with.
The income statement tells you how much money you made during the reporting period, and how much you spent.
The cash flow statement tracks where money is going between different parts of your business, and how much you have on hand.
If your property management business is small and not very complicated, you can take a stab at generating your own financial statements. Accounting software can typically manages this. To generate a financial statement in Excel, you can use a template, like Bench’s Income Statement Template.
But to save time and money, and to make sure the statements are accurate, you’re better off outsourcing them to a bookkeeper or accountant.
If you’re a Bench customer, your bookkeeper will prepare them for you. With Bench, you’ll also be able to see a breakdown of your revenue and expenses by each property, so you can see how they stack up.
Step 6: Track deductible expenses
A lot of the money you spend on your rentals can be deducted. Here’s a round-up of the expenses business owners typically deduct when they rent property.
- Supplies for maintenance and cleaning
- The cost of repairs
- Mileage for travel to and from the property
- Tax preparation and professional accounting
- Lease cancellation costs
- Legal fees
- Management fees
- Real estate taxes
- Mortgage interest
- Wages paid to on-site property managers or maintenance people
- Money paid to contractors for repairs or maintenance
Keep in mind that this list doesn’t include depreciable property.
You can get a detailed list of every deductible expense from IRS Publication 535, Business Expenses.
You can also check out our simplified version, the big list of small business tax deductions.
Filing taxes for a property management company
When it comes time to file your taxes, there are three different ways to do it, each depending on the specifics of how you rent out your property.
Keep in mind that, if you have multiple rental properties, the income and expenses for each will need to be listed separately on your income tax form.
Filing taxes for a separate residence
If you’re renting out a residence separate from your own, the way you file taxes will depend on the services you provide your tenants—whether those are basic services, or substantial services.
Basic services include utilities, maintenance, trash removal, and cleaning common areas. Think apartment, not hotel. To report these, you use Schedule E, Form 1040. You may also need to include Form 4562 if you’re depreciating a property you purchased in 2018, or depreciating the price of a vehicle or vehicle-related expenses.
Substantial services include cleaning the private rental unit, changing linens, or providing meals. Think hotel, not apartment. In this case, you report your income on Schedule C, Form 1040.
Filing taxes for a shared residence
If you rent out part of your home, you need to divide your expenses between the part of it you use for rental purposes, and the part you use for personal purposes.
Some expenses that apply to both the personal and rental part of your home can be deducted as business expenses. For instance, if you paint a room that you typically rent out, you can deduct the expense—even if it’s an improvement that might increase the value of your home overall.
Other expenses that apply to both your personal and rental property need to be divided. For instance, you may share an electrical bill with your downstairs rental suite. In that case, the IRS lets you split the expense by “any reasonable method.” That includes dividing it by the number of people using it, by the number of rooms in your home, or by square footage.
You can learn more about different ways to split expenses from IRS Publication 527.
Regardless of what expenses you deduct, you report your property income on Schedule E, Form 1040.
Filing taxes for a seasonal rental
If you rent out your personal property for part of the year, you divide your expenses based on how much time it was rented out for. Typically, that means multiplying the total expenses by a fraction.
For instance, suppose you rented out your home four months last year—one third of the year. To deduct the cost of electricity as a rental expense, you would take your total electricity bill for the year, and multiply it by 1/3.
There are certain exceptions to this guideline if you rented out your property for less than 15 days during the year. To learn more about this exception, check out the IRS website.
Regardless of what expenses you report for your seasonal rental, though, the income is reported on Schedule E, Form 1040.
If you want to run a tight ship, you’ll need good record keeping skills. The IRS also requires that you keep all essential financial records for at least three years. Learn the fundamentals with our guide to small business recordkeeping.