Book keeping software for house hacking

[Brian Sherman]

Hey BP,

Just got my first triplex that needs some reno before I can open for business. I'm living in one of the units. I set up a seperate bank acct. Now I need a book keeping software, what would you all recommend. I'm thinking that I should be able to manage the business and personal finances with this software, and maybe need something that can grow with me. Any suggestions?

[Joe Splitrock]

It is not just a matter of tracking income and expenses, but knowing what you can claim, where to categorize it and whether to capitalize it. It is really best to meet with a tax professional who can set you up and explain things to you. 

First thing to consider is living in a triplex, only a portion of certain expenses can be claimed. For example, if the units are all the same size, only 2/3 of mortgage interest can be claimed as an expense. This applies to any common expense, such as garbage or roof replacement.

Another thing to consider is that expenses incurred prior to "in service date" are capitalized. In service date is the date that the property is listed for rent and available for rent. If you are rehabbing the other two units, the property is not in service. That means you can't claim certain expenses and other expenses add to basis. 

The next topic is establishing basis. That is tax value of the structure for depreciation purposes. You take purchase price and subtract land value, which can be a lot in California. Then you take structure value and divide it by personal versus rental space. Assuming 1/3 is used for personal, you will take 2/3 of the structure value as basis. This is then divided by 27.5 years to determine annual depreciation. 

Rehab expenses are improvements and they are added to basis. If you do a $50,000 rehab on 2 of the 3 units, that adds $50K to your basis for depreciation. If you spend $10,000 improving the unit you live in, that is not a business expense. 

Repairs are different than improvements. Generally speaking, repair is fixing something and improvement is replacing something. Repairs can be expensed fully in the year they occur. Improvements are capitalized (depreciated). 

Your mortgage payment is not deducted. Only the interest, taxes and insurance portion of your payment are deductible. They are only deducible after the property is in service and only the rental portion (2/3 in the example we have been using).

You will also find some expenses that you may only be able to claim a portion. If you only own two rental units, you can't write off the full expense of a car or cell phone. There has to be reasonable business need for an expense. You may be able to write off a portion. For example, you may be able to claim mileage on your car when using it for business. Cell phone, you may be able to claim a portion of your monthly bill, like 10%. It is prorated based on the percentage of time used for business. 

I have used spreadsheets for 15 years to track expenses and income. We track by property, expense type and name of payer/payee. It is a very simple spreadsheet, which we just pass over to our accountant. He tells use we are very well organized. Some people just hand him a shoe box of receipts, haha.

If you didn't understand everything I said in this post, I would highly recommend a tax professional for your first year at least. If you can follow everything that they did on your taxes, you may be able to take it over year two.