Getting those valuable tax deductions on your real estate income necessitates proper bookkeeping of
income and expenses. If you haven’t read it already check out this article on
record keeping and portfolio
performance tracking.
You also need supporting documents to back up the records in your books. The IRS knows very well
that you can claim anything in your books and on your tax returns, because you create or complete
them yourself. For this reason, the IRS requires that you have documents to support the deductions
you claim on your tax return. In the absence of a supporting document, an IRS auditor may conclude
that an item you claim as a rental activity expense is really a personal expense, or that you never
bought the item at all. Either way, your deduction will be disallowed or reduced. At a minimum, every
deduction should be supported by documentation showing:
- what you purchased for your rental activity
- how much you paid for it, and
- whom (or what company) you bought it from.
You must meet additional record-keeping requirements for local transportation, travel, entertainment,
meals and gift deductions, as well as for certain long-term assets that you buy for your rental
activity. You can meet the basic requirements by keeping the following types of documentation:
- sales receipts
- account statements
- invoices, and
- petty cash slips for small cash payments.
Paper receipts and other cash slips may fade over time. By the time the IRS audits your return,
you may find that all or most of the paper receipts you’ve carefully retained in your files are
unreadable. Alternatively, you can use your smart phone to take digital photographs and upload them
to a cloud storage service like
Google Drive
or
Dropbox which offer free durable storage.
Checking account
One of the first things you should do is setup a separate checking account for your rental activity.
Your rental checkbook will serve as your basic source of information for recording your rental
expenses and income. Deposit all of your rental income into the account and make rental related
payments by check from the account. Don’t use your rental account to pay for personal expenses or
your personal account to pay for rental activity items. Using a separate account will provide these
important benefits:
- It will be much easier for you to keep track of your rental income and expense if you pay
them from a separate account.
- Your rental account will clearly separate your personal and rental activity finances; this
will prove very helpful if the IRS audits you.
- Monthly account statements act as supporting document to prove an expense.
Keep in mind that some states require landlords to use a separate account for tenant’s security
deposits.
Credit card
Use a separate credit card for rental activity expenses instead of putting both personal and rental
items on one card.
Credit card interest for rental activity purchases is 100% deductible, while
interest for personal purchases is not deductible at all. Using a separate card for rental related
purchases will make it much easier for you to keep track of how much interest you’ve paid for such
purchases. The monthly statements you get act as supporting documents for the expenses that you
entered in your books. If you have more than one personal credit card, you can use one for your
rental activity only - you don’t need to get a special business credit card.
Proving payments with bank statements
| If payment is by: |
The statement must show: |
| Check |
Check number
Amount
Payee's name
Date the check amount was posted to the account
|
| Electronic funds transfer |
Amount transferred
Payee's name
Date the amount transferred was posted to the account by the bank
|
| Credit card |
Amount charged
Payee's name
Transaction date
|
Cashonplex.com can help you
Cashonplex.com can pull transactions from your
rental checking accounts and credit card accounts from most banks in the USA and Canada. You get email
alerts for transactions that are posted in these accounts. This is a reminder for you to itemize
(if needed), tag and categorize those transactions the next time you login to the platform. If you do
not want to connect your bank account then that's not a problem, you can easily add transactions
manually or by importing them from a CSV file.
We also have predefined set of tags and categories that every real estate investor would need to classify
their transactions and that makes sure all eligible deductions are tracked. When you're ready to do your
taxes all you have to do is hand over the cash flow statement we generate to your CPA. Expenses can
be assigned to tags that belong to the following categories:
- Utilities
- Transfers
- Taxes
- Repairs & Maintenance
- Mortgage & Loans
- Management fees
- Legal & Professional
- Insurance
- Capital Expenses
- Admin & Other
If you are in need of additional tags or categories then just email us and we will take care of that
for you.
Cashonplex.com is designed with every real
estate investor in mind no matter you own 3 or 4 units or hundreds of units. It is web based so you
can track your investments as long as you have access to the internet and a web browser, it works even
on your old computer with internet explorer, it is simple to use because it has an on boarding tool
with which you can start tracking your asset in 3 easy steps, adding income & expenses is automatic
as it can pull transactions from credit card accounts, checking or savings accounts and mortgage
accounts across most banks in US and Canada, it is safe as it does not store your bank credentials
because it is integrated with one of the leading financial API providers
that power popular consumer apps like
Venmo and
Robinhood and finally
it also lets you import transactions via CSV files which enables you to import transactions that
your property manager gives you from his/her software or from anywhere else.
Cashonplex.com is 100% free to use for 2 months
- no credit card required.
Sign up
now to start a free trial.