If you use your car to go to and from the property, keep a digital or paper log to document the purpose of your trip. You can then multiply the number of miles by the IRS’ suggested mileage rate for the year and deduct that on your Schedule E.
If you have to pay for parking when you visit your properties, keep those receipts, too.
If you use your home office exclusively to conduct active real estate activities, such as tenant screening, service maintenance handling, and property hunting, you can claim a home office deduction for the use of that space.
You have two options in this case:
- Take a simplified deduction of $5 per square foot of your home used for business with a maximum of 300 square feet.
- Keep meticulous records of your home expenses and multiply them by the percentage of your home that the office takes up.
If your house is 2,000 square feet and your home office is 200 square feet, your office makes up 10% of your house. If your internet, utilities, and other expenses were $2,000 for the year, you can deduct $200 for the home office (you'd need to keep records of the costs). Conversely, the simplified deduction would be $1,000.
If you build yourself a home office or make improvements to your existing one, you cannot deduct those expenses. Instead, you can add the improvement expenses to the total cost basis of your home and depreciate it. That lets you earn back some of that money through depreciation deductions.
If you have any doubts about whether to save a document or receipt, just save it. The IRS even lets you digitize your documents to save storage space.
You could get sued, need to file an insurance claim, or need to sell at top dollar
The IRS isn’t the only entity that may be interested in your records. Aside from accounting paperwork to keep for your taxes, also keep items like these:
- Tenant applications and screening reports.
- Copies of past and present leases.
- Written requests and notices to tenants.
- Requests and notices made by tenants.
- Rent increase notices.
- Property maintenance records.
- Eviction paperwork.
- All emails and texts to and from tenants.
- Agreements with managers and service contractors (or property owners if you're a property manager).
- Move-in and move-out paperwork.
- Proof of deposits and bank statements.
These types of documents can help if you need to make an insurance claim or become involved in a legal dispute with a tenant or a contractor. If you own an income-producing property and want to sell, a buyer may want to see proof of deposits, income, and expenses to ensure you’re not inflating or deflating them in your pro forma.
You may need a combination of tools
Since every property owner’s needs are different, you need to stay organized. You can create your own system as long as you and an accountant can decipher it.
If you only have one property and it's simple to manage, you can opt to keep an Excel spreadsheet and organize your digital receipts in a Dropbox or Google Docs folder.
At the end of the day, you know your real estate business best. Just remember that the best way to stay out of trouble is to stay on top of documentation.