What type of records do I need to keep for my rentals?
ANSWER:
Accurate and detailed record keeping is an essential business practice for landlords. Typically landlords maintain records for property ownership, tenant information, property/unit information, and tax reporting.
Good records and organizational practices contribute to more effective property management. 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.
You should understand what is required for regulatory compliances for federal, state, and local laws, and what you need for business reporting and property management operations. You can then develop your record keeping system to fit your needs. Your system may be a manual ledger or an integrated software program. The complexity or simplicity of your recordkeeping system matters only in that the system must work for you. Keep in mind that your system must adequately handle your current business operations and future business growth.
A good system is one that records the necessary data in a format and style that is adequate for compliance with business and tax reporting requirements. Your record keeping system must be able to track income and expenses and provide supporting documentation to prove tax returns. Your recordkeeping will include good tenant records to support rental operations and as documentation for compliance with federal, state, and local fair housing laws and landlord-tenant statutes.
If you have employees, there are specific record keeping requirements for employment and payroll reporting. You will need to research applicable requirements.
Documentation retention varies according to the type of record and applicable compliance requirement. Tenant records and property management records will follow retention guidelines per statute of limitation periods or as specified by other requirements. As examples, real property records for purchase and capital improvements are kept throughout the ownership and thereafter for tax record retention periods. Records relating to any legal actions should be retained indefinitely.
QUESTION:
Could you list what types of tenant information I need to keep?
ANSWER:
Maintaining complete, detailed, and up-to-date tenant information is essential to document the individual’s tenancy and the landlord’s compliance with legal obligations. 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,
- Screening documents
- Copy of tenant’s photo identification document,
- Reference checks,
- Consumer reports,
- Background check (as applicable by statute),
- Employment check,
- Income verification,
- Contact information,
- Vehicle information,
- Emergency contact information,
- Lease Agreement,
- Cosigner/Guarantor agreement,
- Monthly rent amount,
- Rent due date,
- Security deposit amount,
- Other fees, deposits,
- Signed Move-in checklist,
- Signed receipt of keys,
- Correspondence,
- Tenant requests,
- Repair and Maintenance records,
- Inspection reports,
- Violation notices,
- Landlord entry notifications, and
- Signed Move-out checklist.
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.
QUESTION:
What about records I need for tax purposes?
ANSWER:
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 you need a record keeping system that provides a record of rental income and expenses with supporting documentation for each property as reported on the tax return Schedule E. If you are audited by the IRS, you 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.
Your record keeping and accounting system for income and expenses can be quite basic. A basic accounting system only requires that you 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 been received.
Maintenance Log
You 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. Document tenant requests for maintenance and keep all correspondence regarding maintenance and repair work in tenant and/or property maintenance files.
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
You may find that a check register with good detail provides much of the record keeping necessary for your 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
You 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, you 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 are not deductible expenses. The cost of these items must be depreciated over a number of years. You should familiarize yourself with depreciation rules and procedures found in certain IRS publications and consult with appropriate tax professionals for guidance on specific circumstances.