Documenting Expenses & Taxes

[Jennifer Sleider]

I am just starting out and I am in an owner-occupied duplex. I am curious to see what people use to document their expenses. especially if you only own a couple units and don't use a property management company. I want to ensure at the end of the year, that taxes go smoothly. I don’t want to talk to an accountant or CPA until I own more than one unit.

• Best way to track expenses?

• Best resource to learn about tax deductions?

[Karolis Matulis]

My advice would be to keep an excel (or google drive spreadsheet) and just keep tracking of all income and expenses. Have two running lists for expenses, one for expenses relating to the whole duplex (real estate taxes, interest, sewer, etc.), and one for tenant expenses (maintenance, improvements, etc). As long as you document everything you can always backtrack to arrive at the right place. 

Easiest approach would be to report all activity on your 1040 until it grows a bit. The information you'll need at tax time will be income (all rent collected), expenses (100% of the tenant expenses and 50% of the common expenses). You'll also have to calculate depreciation on the unit (Bought the duplex for $500,000 1/1/15 and rented it out the same day). You would have an allocation of 50% to the rental unit for basis of $250,000. After an allocation of land of lets say 10% you'll have depreciable basis of $225,000 with a recovery period of 27.5 years. You will have annual depreciation expense of $8182 ($225,000/27.5). The only expense that is not "deductible" is the principal portion of your mortgage payment (interest is good). Major improvements are also not deductible right away. A $25,000 addition to the building would have to be capitalized and depreciated over the 27.5 recovery period. 

That should be enough to get your started but if you need help sleeping at night you can read IRS Publication 527 here.