| As a landlord, your tightest months for cash flow are | | | | may also be a better deal for you. That 48.5 cents per |
| usually at the end of the winter and beginning of spring, | | | | mile applies whether you are driving a new Hummer |
| in March, April and May. You've just finished paying for | | | | H2 or an old Toyota Corolla. Obviously you spend a lot |
| the extra costs that winter brings; sky-high utility bills, | | | | less than 48 cents a mile driving that old Toyota (and it |
| snow and ice removal, heating issues and so on. Not | | | | makes a better impression on your tenants). |
| only that, but any vacant units probably took longer to | | | | You should record auto expenses by mileage every |
| fill because people are less likely to move during the | | | | time you take a trip related to your investments; these |
| winter. You might even have had damage from ice | | | | include every time you drive to a building. Once per |
| dams or frozen pipes. | | | | month, if you can afford to do so, pay yourself for the |
| The end of the winter is the worst possible time to get | | | | mileage or any other expenses from personal funds |
| a huge unexpected bill. And yet here it comes; | | | | with a check from your business account. Record that |
| hundreds or even thousands of dollars due to your | | | | as well. (Obviously you can't record mileage expenses |
| {{{CPA or bookkeeper|tax advisor}}}. | | | | as you incur them (the day you drive) and when you |
| Fortunately, there are ways to really reduce this bill | | | | reimburse yourself - that would be double dipping.) You |
| without adding a lot to your workload. The key is to | | | | can also expense tolls and parking fees, but not tickets |
| organize your tax documents in a way that will let your | | | | or other legal fees from parking or driving violations.o |
| tax advisor (or yourself, if you do your own business | | | | Mortgage Interest: new landlords often think they can |
| taxes) prepare your return in a lot less time. | | | | expense all of their debt service, which is your |
| I use property management software to organize all | | | | mortgage payments plus any other money paid |
| of my income, expenses and assets, and make sure | | | | toward retiring the loan. But you can't expense the |
| that my bank account statements match up with my | | | | money that goes toward principal because it's not |
| own personal accounting. It's faster than maintaining | | | | really an expense. For example, suppose you make a |
| my records in Excel, and it only takes a little longer | | | | $1,000 mortgage payment, $200 of which goes to |
| than the method used by lots of old-school landlords; | | | | principal and the rest to interest. By doing so, you |
| stuffing all their records into a shoe box and hoping for | | | | spend $1,000 from your checking account, while |
| the best. | | | | increasing your equity in the property by $200. The |
| Because you've organized your land lording income | | | | correct transaction will be a $1,000 credit to the |
| and expenses in your property management software | | | | checking account, an $800 debit to the Mortgage |
| as they occur throughout the year, they are | | | | expense and a $200 debit to the Building Equity Asset |
| completely organized and ready for you at the end of | | | | account. Your rental property program should calculate |
| the year, at tax prep time. Somebody's going to be | | | | this automatically.o Depreciation: this expense relates |
| doing a lot less work then - either your tax advisor | | | | to the natural deterioration that happens to almost any |
| (which means you pay him less) or yourself (which | | | | long-lasting asset. Most landlords think of depreciation in |
| means you get to bed earlier). | | | | terms of buildings. For example, most residential |
| You want your records to be organized along the | | | | buildings have a depreciation period of 27 1/2 years. |
| categories of the IRS Schedule E form, which you use | | | | This means that you can take 1/27.5 (3.63636... |
| to report rental property income and loss, along with | | | | percent) of the building's value as an expense each |
| income and loss from related investments such as | | | | year; until you've owned it for 27.5 years or sell it, |
| partnerships and trusts. You'll need to submit an IRS | | | | whichever comes first. How are you going to |
| Schedule E along with your 1040 tax return. You'll also | | | | determine the building's value? Multiply the purchase |
| take the summarized results from the Schedule E and | | | | price by this ratio: building assessment / overall |
| incorporate them into your 1040 calculations. You can | | | | assessment. You can usually get the assessments |
| do all this with the correct property management | | | | from the town or county. |
| software. | | | | It makes a lot of sense to depreciate items in a building |
| There are two Schedule E categories for Income and | | | | separately from the building itself, because such items |
| 14 for Expenses. For Income, any time you receive | | | | usually have shorter recovery periods (meaning you |
| rents, you'll record them in your rental property | | | | can take more of the value - as much as 20 or even |
| program as a deposit; thus updating both your bank | | | | 33 percent - each year until the end of the period). |
| account records and your ledger account records. For | | | | Depreciation is tricky - one reason is that the federal |
| Expenses, any time you spend money on anything | | | | government frequently changes depreciation rules in |
| related to your properties, you'll record those | | | | esoteric ways. For example, they changed the rules to |
| Expenses either through the check register or a journal | | | | make investing in New York City more appealing after |
| entry. Your property management program should let | | | | the 9/11 attacks. It may make sense to get some |
| you enter any Expense under a category that | | | | additional help from your tax advisor here. |
| matches a Schedule E category; they are Advertising, | | | | Around February 1st of the new year, print out a profit |
| Auto and Travel, Cleaning and Maintenance, | | | | and loss report and all of your bank reconciliation |
| Commissions, Insurance, Legal and other Professional | | | | reports for the previous year. All of this information will |
| Fees, Management Fees, Mortgage Interest, Other | | | | be neatly organized by your property management |
| Interest, Repairs, Supplies, Taxes, Utilities, Other, and | | | | software. Review the reports carefully and either send |
| Depreciation. Some of these property management | | | | them to your tax advisor or enter the information into |
| expense categories will make perfect sense to you, | | | | tax forms yourself. If you send them to your tax |
| but others may need explanation.o Advertising: this is | | | | advisor, include the actual bank statements as well. He'll |
| really all of your marketing expenses, including things | | | | want these records to prove that you recorded all of |
| like signs and web postings.o Auto and Travel: this is | | | | your financial transactions honestly. |
| an easy Expense to miss because you won't pay it | | | | At the same time, make sure your CPA or |
| with a check or something else that's easily tied to | | | | bookkeeper knows that you're NOT expecting him to |
| your bank accounts. One option is to record all the | | | | do your Schedule E calculations all by himself. You |
| actual expenses such as gas, oil and depreciation. The | | | | don't expect to be charged for all that work, either. |
| other, simpler way is to just record your mileage spent | | | | Last point - even though property management |
| on business travel and multiply the total times the | | | | software is going to help you with your record keeping |
| current per-mile expense rate (48.5 cents for 2007). | | | | and calculations, don't throw out your paper records. |
| Not only is it simpler to record expenses this way, it | | | | You'll need them if you are ever audited. |