Rental property books look simple — rent comes in, a mortgage and some repairs go out — until tax time, when your preparer asks for income and expenses by property, a list of improvements, and the interest portion of every mortgage payment. A year of deposits into one checking account does not answer any of those questions.
Here is how to set up the books for long-term rentals so each property's numbers are ready when you need them, whether you own one duplex or a dozen doors.
Track every property on its own
Rental income and expenses are generally reported on Schedule E, property by property. That means the books need to know which property every dollar belongs to. In most accounting software that is done with classes, locations, or tags — one per property — applied to every rent deposit and every expense. Shared costs like a software subscription or your mileage between properties can be split or kept in a general bucket; ask your preparer how they want them allocated.
A separate bank account for the rental activity, apart from your personal accounts, is the single biggest improvement most landlords can make. Some owners with several properties keep one account per property or per LLC. Either works, as long as personal spending never runs through it.
Tagging by property also shows you something useful: which units actually make money after repairs, vacancy, and financing, and which only look good on the rent roll.
Security deposits, advance rent, and property managers
A refundable security deposit is not income when you receive it. It is money you owe back to the tenant, so it is recorded as a liability. It becomes income only if and when you keep some or all of it — for damage or unpaid rent — at which point the kept amount moves from the liability to rental income. If a tenant's deposit is applied as the final month's rent, it is income at that point. Many states have rules on where deposits must be held and whether interest is owed, so check yours.
Advance rent is different. Rent received in advance, such as last month's rent collected at signing, is generally income in the year you receive it, regardless of the period it covers. Labeling it a deposit does not change that if it is really prepaid rent.
If a property manager collects rent and sends you the net, record the full picture: gross rent as income, and the management fee, repairs, and anything else they deducted as separate expenses. Recording only the net deposit understates both income and expenses, and it will not match the year-end statement the manager sends. The same principle applies if a tenant pays a bill for you and deducts it from rent: that is rent income plus a deductible expense.
Repairs, improvements, and the mortgage
A repair keeps the property in its normal working condition — fixing a leak, patching drywall, replacing a broken window pane — and is generally deductible in the year paid. An improvement makes the property better, restores it, or adapts it to a new use — a new roof, a kitchen remodel, a new HVAC system — and is generally recorded as an asset and depreciated. Residential rental buildings and their improvements are depreciated over 27.5 years; the land underneath is never depreciated. There are safe harbors that let some smaller items be expensed, and the line is not always obvious, so keep invoices with a clear description of what the work was and let your preparer make the call.
Mortgage payments need to be split. Only the interest is an expense. The principal portion reduces the loan balance on the balance sheet. If the lender escrows property taxes and insurance, those are expenses when the lender actually pays them, and the escrow deposits in between are an asset. Your lender's annual Form 1098 and escrow statement give you the figures to reconcile against.
Keep the closing statement from every purchase, too. The purchase price, closing costs that get added to the property's basis, and the split between land and building all feed the depreciation schedule for as long as you own it.
Rental books that are ready for tax time
The goal is simple: income and expenses by property, deposits held as liabilities, improvements on a depreciation list, mortgages split between principal and interest, and every account reconciled to its statement. If you hire contractors for the properties, ask your preparer whether 1099s are required for your situation.
Evolv Bookkeeping is $199 per month flat: every account reconciled and your financial statements delivered by day 2 of the following month, with 1099 prep at year end. If your rental books are months behind or mixed into one account, cleanup is $199 for each month behind, completed within 2 days and guaranteed in writing. No contracts, cancel anytime, and you can get an instant quote on our homepage.