How to Organize Taxes for Rental Houses

Maintaining accurate records on rental houses simplifies income tax preparation but also permits capturing tax benefits for landlords. For example, the cost of rental property is depreciated as an income tax deduction over several years. This is an advantage over other investments with costs that are not depreciated. In addition, some of any loss on rental houses caused by expenses exceeding rent collected is usually deductible against other taxable income. A separate record is required for each property that provides details of cost, rent collections and expenses.

Write the addresses of different rental houses on the top of separate ledger pages. Attach to each ledger page the settlement statement from closing of the house purchase.

Record rental income when actually received for a property in a column labeled “Rent” on the ledger page devoted to that house.

List various expense categories as column headings on each ledger page. Deduct each expense amount when paid in the correct column category of the ledger page associated with the property incurring the expense. The result is an assembly of expenses by category for each property. Customary categories of rental expense are insurance, utilities, advertising, repairs, maintenance and property tax.

Calculate depreciation for each rental property using IRS Publication 946, or use the services of a tax professional for this calculation.

Tips

  • Ignore mortgage payments as an expense. Only the interest component is a deductible expense. Repayment of loan principal is not a deduction, because it’s part of your original investment. Every lender reports to you the deductible mortgage interest expense on an annual form.