You’ve spent hours researching how to set up a property for rent, the administrative side of becoming a landlord, how to cultivate good tenants, and a dozen other things you learn as a new property manager.
One thing that you might not have thought of is all the accounting you have to handle.
Chances are you don’t have your own accountant or bookkeeper to do all the day-to-day work for you, so understanding essential parts of accounting keeps you from ending up in a world of financial trouble.
Schedule E
The main thing to worry about is whether you’re about to run afoul of the IRS.
They aren’t going to look kindly on you failing to file properly, and they don’t care if you’re a first-time landlord who doesn’t know exactly what he’s doing yet.
Schedule E: Reporting Rental Income and Loss is the primary form you’re working with.
This form applies to homes from which you receive rental income, as well as renting rooms within your main residence if the length of the stay exceeds two weeks.
The easiest way to keep track of rental income is tracking tenants’ rent checks using a simple spreadsheet.
If your tenant pays through an electronic payment portal, it’s even easier to keep exact rental income records.
Deductions
Tracking rental income is simple, but it’s not as easy keeping track of all the expenses associated with the properties and whether these expenses are deductible.
Use property management software or an accounting package to keep track of expenses associated with a particular property so that you have a full list of what you can deduct from your net rental income.
Capital Gains
Another tax consideration to keep in mind is what happens when you sell one of your rental properties.
You will be required to pay capital gain taxes on profits that you receive from sale, which depends on your property’s value.
You can reduce the overall amount that you pay with deductible costs and property depreciation.
Capital gains increase if you make additions to the property.
You can avoid the capital gains tax if you’re going to use the money to buy a new property or improve an existing property.
The property has to fall under several criteria in order to qualify for a 1031 exchange, which is what this procedure is called.
Passive Income
One of the biggest adjustments to get used to when becoming a landlord, especially if you come from a salaried job, is that your income is not based on the amount of time you work.
Instead, it’s a passive income that is generated based on the properties that you hold.
While you do hands-on work with maintenance, marketing, and other activities, the amount of money you make is not related to the amount of work you put in.
