Real estate bookkeeping looks simple at first: rent comes in, bills go out. But once you own a few properties or run a real estate company, the questions get harder. Which property made money this year? Is that new roof a repair or an improvement? Is a tenant's deposit income? Getting these right affects both your tax return and the decisions you make about each property.
I've kept books for real estate companies, and these are the practices that keep rental property books clean and ready for tax time.
Track every property separately
The most useful thing your books can tell you is how each property is doing on its own. To get that:
- Record every rent payment and every expense against the property it belongs to.
- In QuickBooks Online, use class or location tracking (available on the Plus and Advanced plans) to tag each transaction with its property.
- Run a profit and loss report by property each month.
Some owners keep a separate bank account for each property or each LLC. Whether or not you do, never pay property expenses from a personal account. It mixes the records and makes expenses harder to prove.
Security deposits are not income
A security deposit you expect to return to the tenant is a liability, money you're holding, not rent. Record it in a security deposits liability account when you receive it. If you later keep part of it for unpaid rent or damage, that part becomes income at that point.
Repairs vs improvements
The answer changes when you get the deduction:
| Repair | Improvement | |
|---|---|---|
| What it does | Keeps the property in working condition | Makes the property better, larger or longer lasting |
| Examples | Fixing a leak, patching drywall, replacing a broken window | A new roof, an addition, a full kitchen remodel |
| Tax treatment | Usually deducted in the year it's paid | Added to the property's cost and depreciated over time |
Record improvements in a fixed asset account, not as an expense. Keep the invoices, because the line between the two isn't always obvious and you may need to explain your choice.
Depreciation
You can't deduct the cost of a rental building all at once. Instead, it's depreciated over 27.5 years for residential rental property and 39 years for commercial property. Land is never depreciated, so the purchase price has to be split between land and building.
Depreciation is usually calculated by your tax preparer, but your books need to show what you paid for each property and each improvement, and when.
Pay contractors the right way
Plumbers, electricians, cleaners and landscapers you pay for your rental business may need a Form 1099-NEC at year-end. Collect a W-9 from each one before you pay them, and track what you pay each contractor through the year. My guide on how to file 1099s in QuickBooks Online walks through the process and the new threshold.
A chart of accounts for rental property
| Section | Example accounts |
|---|---|
| Assets | Operating bank account, buildings, land, improvements |
| Liabilities | Mortgages payable, security deposits held |
| Income | Rental income, late fees, other tenant charges |
| Expenses | Mortgage interest, property taxes, insurance, repairs, property management fees, utilities, HOA fees |
For how to build and number accounts, see my guide to the chart of accounts.
The monthly routine
- Record rent received for each property and follow up on anything missing.
- Record and categorize every expense by property.
- Reconcile every bank, card and loan account.
- Split mortgage payments into principal and interest using the lender's statement.
- Review the profit and loss by property and the security deposit balance.
If your records have fallen behind, a catch-up bookkeeping project can rebuild them property by property.
Want your real estate books handled?
I've spent 38 years in accounting, and I work with real estate companies and property owners online from Weatherford, Texas, keeping the books by property and ready for tax time. See my bookkeeping services or book a short intro call.
This article is general information, not tax advice for your specific situation. Tax rules for rental property can change, and your own situation may differ.