Owning an investment property is a lot like owning a small business. Money comes into the business in the form of rental payments and flows out of the business through operational and maintenance expenses. If everything works correctly, you’ll show a profit at the end of the year. While an investment property requires less work than many other kinds of small businesses, owners must be diligent about documentation and record-keeping. Rental property finances can be complicated, especially when tax time rolls around. Moreover, any time your business deals with other people, it’s essential to keep accurate and easily-accessible records in place. In the event of an IRS audit, lawsuit, or Fair Housing Claim, accurate and timely documentation can be a lifesaver. As an investment property owner, you should keep three different types of records.
As the owner of an investment property, the IRS allows you to take several different tax deductions, which can reduce your rental income and subsequent tax payments. However, the IRS wants you to be honest and accurate with every deduction you take. If the IRS audits your business, you’ll need to back up every deduction with clear documentation of the corresponding expense. It will take a bit of practice, but documentation and record-keeping should be an ongoing process. That means, don’t wait until April to organize your receipts. Instead, set aside time every week or every month to review your income and expenditures. Then, update your spreadsheet, accounting software, profit and loss statement, or whatever record-keeping method you’re using. Once you get in this habit, tax season will be much less painful.
Here are the Records You Should Keep for Tax Purposes:
- Mortgage Interest: Lenders include this information on your mortgage statement and typically provide a year-end interest total.
- Insurance Premiums: Protecting your investment against loss is considered a business expense and may be deductible.
- Maintenance & Repairs: Ongoing maintenance and one-time repair costs are considered deductible expenses.
- Administrative Costs: You can also deduct other expenses like advertising, mileage, supplies, and more from your rental income.
- Depreciation: Some investment property expenses can be deducted as depreciation, which allows owners to devalue an asset over time due to age or wear and tear.
- Rental Payments: This is your business income. So retain all canceled checks or bank transactions that show these payments.
- Property Taxes: Under certain circumstances, homeowners can also deduct property taxes.
Filing tax returns, which include investment property income and expenses, is extremely complicated. Therefore, you should seek out the advice of a qualified tax preparer who can help you navigate these waters and file your tax returns correctly.
In addition to tax records, investment property owners should maintain detailed documentation for every property they own. This documentation will help in the event of any property disputes, legal actions, building permit applications, local code enforcement, and more. These property records might include:
- Legal documents relating to fines, inspection reports, or court appearances.
- Any permits you’ve taken out on the property.
- Any depreciating items.
- Insurance policies.
- Loan and mortgage documents.
- Agreements with managers and service contractors.
- Property title or deed.
- Past year’s federal and state tax returns (if applicable) as well as property tax records.
These documents may also be helpful if, at any point, you decide to sell your investment property.
The landlord-tenant relationship is subject to several federal, state, and municipal regulations. As a result, investment property owners who violate these laws could be subject to civil penalties. That’s why owners need to keep detailed records of their interactions with tenants. As you maintain your tenant files, include information on the following items:
- Tenant applications and screening reports
- Copies of all signed leases.
- All written tenant requests and notices.
- Requests made by tenants.
- Rent increase notices.
- Property maintenance records.
- Eviction paperwork (if applicable).
- All digital communication to and from tenants.
- Move-in and move-out paperwork, including property condition and damage reports.
- Proof of rental deposits and bank statements.
In all likelihood, you’ll follow the law, treat your tenants fairly, and never be subject to legal action from a government agency. However, if you own an investment property long enough, you’ll likely become involved in some dispute or disagreement with a tenant. In those instances, having ready access to tenant documentation will help you prevail.
How Long Should I Store These Records?
The general rule of thumb says to keep tax records for at least three years. However, some experts recommend keeping permanent records of your tax returns. You should also save property and tenant documentation permanently. Most experts recommend storing these records in two forms. Hard copies kept in a secure filing cabinet and digital copies uploaded to a cloud storage provider like Dropbox or Google Drive. With a consistent and disciplined record-keeping system in place, you’ll feel more in control and be able to get the most out of your investment property.
Professional Property Management Can Help
Owners who work with Rent Portland Homes by Darla Andrew can count on our comprehensive record-keeping system to document every aspect of their rental property. Part of that system includes an online dashboard that allows owners to view their rental payments, maintenance work orders, property photos, and more. Plus, at the end of every year, we’ll send out handy tax documents that will make filing your return easier.
If you’d like to learn more about partnering with Rent Portland Homes by Darla Andrew, we’d love to talk. You can call or text Darla at (503) 515-3170. Or, you can fill out the contact form on our website. Our mission is to make investment property ownership easy and profitable for our clients. We’d love to show you how.