You're entitled to deduct all ordinary and necessary expenses related to generating income from your rental real estate. Typical deductions for rental properties are local real estate taxes, mortgage interest, repairs, insurance, commissions, and property manager fees.
Many investors get worried when they hear this. They've been told real estate is a beautiful way to shelter income from taxes but now they are being barred from taking the well-deserved losses.
Rental Property Expense types
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- Auto and travel
- Cleaning and maintenance
- Legal and other professional fees
- Management fees
- Mortgage interest paid to banks, etc.
- Other interest
This is a popular deduction, but it's also one you need to be careful about, as it can trigger audits. You have to set aside a percentage of your home for only doing work/business/real estate investing-related activities, and that percentage of your housing bill can be deducted. And 2020 may see this deduction scrutinized even more
If your adjusted gross income (line 37 of IRS Form 1040) is less than $100,000, you are able to take the loss reported on line 26 of Schedule E up to a maximum amount of $25,000 annually.
What Records Should I Keep?
Good records will help you monitor the progress of your rental property, prepare your financial statements, identify the source of receipts, keep track of deductible expenses, prepare your tax returns and support items reported on tax returns.
Maintain good records relating to your rental activities, including the rental income and the rental expenses. You must be able to document this information if your return is selected for audit. If you are audited and cannot provide evidence to support items reported on your tax returns, you may be subject to additional taxes and penalties.
You must be able to substantiate certain elements of expenses to deduct them. You generally must have documentary evidence, such as receipts, canceled checks or bills, to support your expenses. Keep track of any travel expenses you incur for rental property repairs. To deduct travel expenses, you must keep records that follow the rules in chapter 5 of Publication 463, Travel, Entertainment, Gift, and Car Expenses.
Create Your Own Spreadsheet
You can create your own spreadsheet with a program such as Excel to keep track of your expenses (such as insurance) and income (from rent and other sources). Use one spreadsheet per rental and then total them all at the end of the year.
Paper vs. Electronic Records
The first choice you need to make is whether to keep paper records you create by hand or to use computerized electronic record keeping
. Either method is acceptable to the IRS.
Although it may seem old-fashioned, many small landlords owners keep their records by hand on paper, especially when they are first starting out. You can use a columnar pad, notebook paper, or blank ledger books. There are also "one-write systems" that allow you to write checks and keep track of expenses simultaneously. Go to your local stationery or office supply store and you'll find what you need.
Manual bookkeeping may take a bit more time than using a computer, but has the advantage of simplicity. You'll always be better off using handwritten ledger sheets, which are easy to create and understand and simple to keep up to date, instead of a complicated computer program that you don't understand or use properly.
If you want to use electronic record keeping, there are many options to choose from. These range from simple checkbook programs to sophisticated property management software
. We won't discuss how to use these programs in detail. You'll need to read the manual and/or tutorial that comes with the program you choose. However, if you're not prepared to invest the time to use a computer program correctly, don't use it!
Make sure you consult a tax professional.