2024 Tax Planning Series: Real Estate Activity Compliance- What You Don’t Know Can Impact Your Taxes!

As noted in several of our blogs, real estate is an attractive way to build wealth, including owning rental property. Understanding the importance of keeping accurate accounting records is as important as collecting the rent on time each month. Without accurate records, you can negatively impact your taxes.

Landlords must report all rental income on their tax returns each year. Generally, you can deduct certain costs for maintaining and operating the rental property from their rental income. Understanding the process is critical to complying with current tax laws.

Rental Accounting Methods

If you use the *cash-basis accounting method*, you must report income in the year it is received. Expenses must be deducted in the year they are paid. The timing of when the income is earned or costs are incurred doesn't matter. For example, if you received rent on December 31, 2024, for the January 2025 bill, you would need to report this transaction as income in 2024.

If you choose the *accrual basis accounting method,* you would report your income when it is earned and not received. Expenses are deducted when they occur, not when they are paid. Using the example above, if you received rent on December 31, 2024, for the January 2025 bill, you would report this transaction as income in January 2025.

Rental Income

Rental income is defined as any payment received for the use or occupation of the property. Landlords must include in their gross income the total money received as rent for each property they own. Additionally, rental income includes monies collected for:

• Advance rent
• Expenses paid by a tenant
• Security deposits
• Monies received to cancel a lease

Rental Expenses - Tax Deductions

Landlords can deduct ordinary and necessary expenses for managing, conserving, and maintaining their rental property. This is in addition to more traditional expenses, including mortgage interest, property tax, operating expenses, depreciation, and repairs.

Recordkeeping

Accurate recordkeeping is key to helping landlords monitor the progress of their rental properties. This includes documenting the source of receipts and deductible expenses and keeping support items to assist in preparing financial statements and tax returns. Without proper documentation, expenses are not claimable. Maintaining receipts, canceled checks, or bills is critical to supporting your expense claims. Equally important is keeping track of travel expenses that you incur for rental property repairs.

The Cambaliza McGee LLP team is an expert in real estate accounting and its impact on taxable income. Contact our team to discuss your accounting needs and identity and ensure you maintain accurate accounting methods.