Recordkeeping For Landlords
Recordkeeping for Landlords
Accurate and detailed record keeping is an essential business practice for landlords. Whether for a single rental property, multi-family properties, or multiple properties, good records and good organizational practices contribute to more effective property management. In turn, a reliable and complete record keeping system provides the data for business financials, tax reporting, and functions as a risk management tool against tenant claims of discrimination or rental disputes.
As with many operational issues, the landlord must understand what is required for regulatory compliance and for business analytics and develop a record keeping system accordingly. The system may be a manual ledger or an integrated software program. The complexity or simplicity of a system is a business decision that matters only in that the system must work for the business. The system must be designed to handle current business operations yet have capability to handle future business growth.
A good system works for the landlord in that it records the necessary data in a format and style that is appropriate to the business model and adequate for compliance with business and tax reporting requirements. The record keeping system must be able to track income and expenses and provide supporting documentation as needed to prove tax returns. Additionally landlords should keep good tenant records to support rental operations and as documentation for compliance with federal, state, and with local fair housing laws and landlord-tenant statutes.
If a landlord has employees, there are specific record keeping requirements including employment tax returns and payroll reporting.
Documentation retention varies according to the type of record and applicable compliance requirement. As examples, real property records for purchase and capital improvements are kept throughout the ownership and thereafter for tax record retention periods while records relating to any legal actions should be retained indefinitely. Tenant records or employment records may follow retention guidelines per statute of limitation periods or as specified by other requirements.
While each business may organize records in a format that supports their specific business needs, typically landlords maintain records for property ownership, tenant information, property/unit information, and tax reporting.
Ownership Property Records
For real property, records relating to the purchase of the property should be kept through the sale of the property and related tax return retention period. Documents may include:
- purchase offer,
- contract,
- closing documents including inspections, appraisal, and title policy,
- property deed,
- loan documents,
- tax records including tax bills, payments, and special tax assessments, insurance policies, and
- any other documents that relate to the purchase and sale of the property.
Additionally the seller should have furnished the original leases of tenants currently living at the property, the original security deposit receipts, manuals and instructions for appliances or other conveyed items, copies of property/unit maintenance and repair receipts, copies of fire and safety inspections, and the buyer should ensure that escrow closing statement shows the correct credit to the buyer for all deposits held by the seller.
Tenant Records
Maintaining complete, detailed, and up-to-date tenant information is essential to document the individual’s tenancy, the landlord’s compliance with legal obligations, and more likely to prevail in any legal conflict with the tenant. Having good documentation can be invaluable in proving a defense against a tenant’s claims or prove the landlord’s case in a court action, such as an eviction.
A good tenant file may include the following documents:
- Property address/unit,
- Rental application,
- Copy of tenant’s photo identification document,
- Reference checks,
- Credit report,
- Background check (if applicable by statute),
- Employment check,
- Income verification,
- Signed lease agreement,
- Contact information,
- Vehicle information,
- Emergency contact information,
- Cosigner/Guarantor agreement if applicable,
- Monthly rent amount,
- Rent due date,
- Security deposit amount,
- Other fees, deposits,
- Lease agreement term – beginning and ending dates,
- Signed Move-in checklist,
- Signed receipt of keys,
- Correspondence,
- Tenant requests,
- Repair and Maintenance records,
- Inspection reports,
- Notices and warnings, and
- Notices of request for landlord entry.
The above list of documents follows customary tenant application/screening/move-in practices. Maintaining adequate records is a critical risk management tool for protecting the landlord’s business.
As a good business practice, any form of landlord-tenant interaction should be documented in writing to provide a paper trail of discussions, agreements or events between the landlord and tenant.
Rental Unit Records
Records should be maintained for each separate rental property detailing income and expenses. This information will be used for financial analysis and tax purposes. Complete, accurate, and detailed information will be needed to prove business tax returns.
Tax Records
For tax purposes landlords need a record keeping system that provides a record of rental income and expenses with supporting documentation for each property as reported on Schedule E of the tax return. If the landlord is audited by the IRS, the landlord must have a paper trail that can prove the expense deductions are legitimate.
Receipts and other supporting documentation should be kept secure yet accessible. A good business practice is to regularly backup and store copies of all documentation at an off-site location in case of emergency such as burglary or fire, computer failure, or natural disaster.
A landlord’s record keeping and accounting system for income and expenses can be quite basic. A basic accounting system only requires that the landlord keep a rent roll, a maintenance log, a check register, and all bills and receipts.
Rent Roll
A typical rent roll lists the address with building/unit number, type of unit and square footage, tenant name, move-in and move-out dates, lease term and expiration date, security deposit amount, rent amount, other income (e.g. storage locker), other charges (e.g. late fees), amount paid, and balance due. The rent roll records the date rent was received, the amount paid, the check number or other specifics of payment, and the name of the account holder.
A landlord is expected to have a receipt and deposit system for all collected rents. In case of an audit, the IRS is likely to want to trace all deposits. This means that they will want to know where all the money came from and will want to know what happened to all the rents received, or should have received. The better the landlord’s records, the less like IRS auditors are to look for fraud or errors.
Maintenance Log
A landlord should keep good records for all maintenance and repairs to the property. A maintenance/repair log should record when the work was done, who did the work, what materials were used/purchased, and the manner of payment. The landlord should document tenant requests for maintenance and keep all correspondence regarding maintenance and repair work.
A record of tenant maintenance requests and timely resolution can reduce the amount of expensive legal costs in the event of accidents to tenants or their guests on rental property. Good maintenance records help prove landlord compliance with habitability laws and property inspections.
Check Register
A landlord may find that a check register with good detail provides much of the record keeping necessary for his business and tax reporting.
Every check should be coded with details of the expense – the familiar who, what, when, and why notations. Every deposit of income should contain the same kind of information. The same register can be used to record details of cash income and cash disbursements. A separate business checking account rather than comingling personal and business deposits and expenditures allows for better organization of business income and expenses and provides details if needed for audit purposes. It can also avoid an auditor seeing other issues regarding the landlord’s personal life, some of which may result in other problems for a tax payer.
Bills and Receipts
Landlords should retain all receipts and document all expenses incurred for rental property operations, including all equipment, fixtures, or services. For tracking and auditing purposes all expenses should be paid by check, credit card, or a documented transaction proving date, time, and amount of expense. Because business records are so important to surviving an audit, landlords must keep all bills and receipts for at least the period of time when the IRS can do an audit.
As long as fraud is not involved, this means that records must be kept for at least 3 years after the return was filed. There is no time limit when fraud is involved.
Some expenditures cannot be fully deducted in the year a cost was paid, that is, they are not deductible expenses. The cost of these items must be depreciated, that is, spread over a number of years. Landlords should familiarize themselves with the rules and procedures for depreciation as found in certain IRS publications or consult with appropriate tax professionals for guidance on specific circumstances.