Excite Tax's answer for Utah landlords: the building depreciates over 27.5 years, the land never does, and each rental gets its own column on Schedule E.
Its own column, yes; its own software file, no. The return wants a separate column (A, B or C) for each rental property on Schedule E, and more than three properties means attaching more Schedules E. Excite Tax's rule is one ledger with every line tagged to a property, and one bank account that holds only rental money. The setup is below.
Rent received, each expense in the categories Schedule E prints on lines 3 to 19, the purchase price split between land and building, every improvement kept apart from repairs, and the fair rental and personal-use days for line 2, listed for each property. The account list is below.
The building only, straight line with a mid-month convention, over 27.5 years, starting when it is ready and available for rent. A building bought for $240,000 and put in service in February earns 3.182%, or $7,637, in year one; the full example is below.
A repair keeps the place working; an improvement makes it better, restores it or changes its use. Fixing a broken lock or painting a room is a repair; replacing an entire HVAC system is an improvement that is capitalized and depreciated. Items up to $2,500 per invoice or item can be expensed if the owner makes the de minimis election that year. More below.
Not when it arrives, if it is meant to go back. The part you keep becomes income in the year you keep it, and a deposit that is to be used as the last month's rent is advance rent, income when received. In the books, a returnable deposit is a liability, not rent.
Often, up to a limit. An owner who actively participates can deduct up to $25,000 of rental loss against nonpassive income, and the allowance shrinks once modified AGI passes $100,000 and is gone at $150,000. Details below.
Yes. The IRS accepts any recordkeeping system that clearly shows income and expenses, and a spreadsheet with one tab per property, columns matching the return, and a monthly bank match does that. Bookkeeping in Excel shows the layout; software earns its cost once there are several units or tenants paying online.
Start with the money. The IRS's first recordkeeping advice to any business is a separate checking account, and for a landlord it matters twice: rent and deposits land in one place, and the mortgage has a clean trail. Interest follows the loan proceeds, and the easiest way to trace them is to keep a loan's proceeds separate from other funds, so a refinance that pays for a car or a kitchen at home is interest the rental cannot claim in full.
Then give every property a tag, class or tab. Schedule E reports each rental property in its own column, so a bill that is not tagged to a property is a bill someone has to guess at in April. Excite Tax's rule is to tag at the moment of entry: the plumber's invoice for the Ogden duplex goes to the Ogden duplex, never to a shared "rentals" pile. Costs that really are shared, such as an umbrella insurance policy, are split by a stated rule and the rule is written down.
Most landlords keep books on the cash method. Most individual taxpayers use the cash method, reporting rent in the year it is received, and a rental held in an owner's own name is reported on that owner's return. Cash vs accrual accounting covers the difference.
The fastest year-end is a ledger whose income and expense accounts are the return's own lines. Schedule E prints them in order; the table below uses them as account names, with the kind of entry that belongs in each. The general version of this list is in chart of accounts for a small business.
Income and expense accounts for a rental, keyed to the lines of Schedule E
| Account | Return line | What goes in it |
|---|---|---|
| Rents received | Line 3 | Monthly rent, late fees, kept deposits, lease-break payments and bills the tenant paid for you |
| Advertising | Line 5 | Listing fees, signs |
| Auto and travel | Line 6 | Miles driven for the rental, from a log |
| Cleaning and maintenance | Line 7 | Turnover cleaning, yard care, snow removal |
| Commissions | Line 8 | Leasing commissions paid to find a tenant |
| Insurance | Line 9 | Landlord policy, this year's share only |
| Legal and other professional fees | Line 10 | Lease review, eviction filings, tax preparation for the rental |
| Management fees | Line 11 | A property manager's monthly percentage |
| Mortgage interest paid to banks | Line 12 | Interest only, from the lender's year-end statement |
| Other interest | Line 13 | Interest on a seller-financed note or a private loan |
| Repairs | Line 14 | Work that keeps the unit in working order |
| Supplies | Line 15 | Light bulbs, filters, smoke-alarm batteries |
| Taxes | Line 16 | The county property tax on the rental |
| Utilities | Line 17 | Water, sewer, trash or power the owner pays |
| Depreciation | Line 18 | The year's depreciation, posted as one entry |
| Other | Line 19 | HOA dues, bank fees, small items expensed under the de minimis election |
The balance sheet carries what the return does not show as an expense, and it is where most landlord books go wrong:
Rent is more than the monthly check, and the timing rules ignore the lease calendar. Each of these goes to the rents account in the year the money or value arrives:
This is the judgement call in every landlord's ledger. Repairs keep the property in ordinarily efficient operating condition, like fixing a broken lock or painting a room; improvements, like replacing an entire HVAC system, are capitalized and depreciated. The test behind it: an expense that betters the property, restores it, or adapts it to a new or different use is an improvement. Patching three shingles is a repair; a new roof is an improvement.
Two rules keep the ledger honest. The value of your own labor is not deductible, so a Saturday spent painting is recorded as the paint, not the hours. And repair and improvement costs are kept apart with accurate records, because the improvement costs matter again at depreciation and at sale.
Small purchases have a shortcut. Without audited financial statements, the de minimis safe harbor covers amounts up to $2,500 per invoice or item, and amounts it covers are deducted as rental expenses on line 19 instead of capitalized. It is not automatic: the election is a statement attached to each year's timely filed return, and it then applies to every qualifying purchase that year. Excite Tax's advice is to record the invoice amount on each small asset so the choice can be made at year-end with the numbers in hand.
The recovery period for residential rental property is 27.5 years, and a building counts as residential rental property when 80 percent or more of its gross rent comes from dwelling units. The method is straight line with a mid-month convention: a building placed in service in any month is treated as placed in service at the middle of that month.
The clock starts when the unit is ready, not when the first tenant signs: depreciation can begin when the property is ready and available for rent. It keeps running between tenants, because a rental that is temporarily idle, for example during repairs after a move-out, is still depreciated.
The number that sets every later year is the land split. The cost is divided between land and building by fair market value, or, where that is uncertain, by the assessed values for real estate tax purposes. Whichever split is used, write down how it was figured, because it fixes the depreciation for the building's whole 27.5-year recovery period. In the first year, Form 4562 goes with the return for property first placed in service that year.
A landlord buys a single-family house in Ogden for $320,000, including the closing costs that belong in basis, such as title insurance, recording fees and transfer taxes. The county's assessed values are $225,000 for the building and $75,000 for the land, so splitting the cost by assessed value puts 75% on the building: $240,000 depreciable, and $80,000 of land that is never depreciated. The house is ready and available for rent in February, a tenant moves in on March 1 at $2,100 a month, and a $2,100 security deposit sits in its own liability account.
First-year depreciation uses the February row of the IRS table: 3.182% of $240,000 is $7,637. Every full year after that is 3.636%, or $8,726, within a dollar of $240,000 spread evenly over 27.5 years.
The Ogden rental's first year, account by account (rented March to December)
| Account | Return line | Amount |
|---|---|---|
| Rents received (10 months at $2,100) | Line 3 | $21,000 |
| Advertising | Line 5 | $150 |
| Insurance (one year's premium) | Line 9 | $1,150 |
| Mortgage interest | Line 12 | $12,300 |
| Repairs | Line 14 | $900 |
| Property tax | Line 16 | $1,750 |
| Water, sewer and trash | Line 17 | $600 |
| Depreciation, building | Line 18, at 3.182% | $7,637 |
| Refrigerator, expensed under the de minimis election | Line 19 | $1,100 |
| Total expenses | Line 20 | $25,587 |
| Net result | Rents less expenses | ($4,587) loss |
Three things in that year never touch the expense lines. The $3,900 of principal paid on the mortgage is not an expense; it lowers the loan balance. The $2,100 deposit is not rent while it is meant to go back. And the $80,000 of land is never depreciated.
The books show a $4,587 loss while the bank shows the rental took in $3,050 more than its cash expenses, before principal: the $7,637 of depreciation is a deduction with no check behind it. After the $3,900 of principal the owner is $850 out of pocket for the year, and with active participation the $4,587 loss can offset wages, under an allowance of up to $25,000 if modified AGI is $100,000 or less. Had the refrigerator cost more than $2,500, or had the election not been made, it would sit on the balance sheet as 5-year property instead.
A cabin in Garden City or a condo in St. George that the family also uses needs a day count as well as a ledger. The return asks for fair rental days and personal-use days for each property, and code 3 on Schedule E is Vacation/Short-Term Rental.
The count changes the deduction. A unit is used as a home when personal use is more than the greater of 14 days or 10% of the days rented at a fair price, and expenses are split by days: 7 personal days and 63 rented days make 10% of the costs personal. At the extreme, a home rented for fewer than 15 days reports no rental income and deducts no rental expenses. Excite Tax's advice is a simple calendar per unit, marked rented, personal or vacant, because that calendar is the only proof of the split.
Most rental real estate is a passive activity, and passive losses generally cannot offset other income, with one exception most small landlords meet. With active participation, up to $25,000 of rental real estate loss can offset nonpassive income like wages. Active participation means owning at least 10% and making management decisions such as approving tenants, setting rental terms and approving expenditures, which an owner who uses a property manager can still meet. The allowance is reduced by half of modified AGI over $100,000 and disappears at $150,000; a loss that cannot be used carries forward to the next tax year, which is one more reason the prior years' books need to agree with the returns filed.
Trips to collect rent, meet a plumber or show the unit can be rental expenses, but travel between home and a rental is generally nondeductible commuting unless your home is your principal place of business. Keep the same log a business owner keeps; what the IRS requires in a mileage log lists the columns.
residential property ... is allowed a residential exemption equal to a 45% reduction... An owner of multiple primary residences ... is allowed ... each residential property that is the primary residence of a tenant
Read plainly: Utah reduces a primary residence's taxable value by 45%, and a landlord gets that reduction on each property that is a tenant's primary residence. The exemption does not reach property used for transient residential use, so a unit that turns into a nightly rental generally loses it and its property tax rises. For the books, the property tax on each rental is posted to that property's taxes account from the county bill, and a jump on the bill after a change in use is a question to raise with the county assessor before it becomes a year's worth of expense.
Furnished units raise a second Utah question, about furniture and appliances as personal property; personal property tax filing in Utah covers it. Trust accounts that a property manager keeps for other owners' money are a separate subject this guide does not cover.
Longer than most records. Every item on Schedule E needs records behind it, and ordinary records are kept 3 years in general, but records relating to a property are kept until the period of limitations expires for the year you dispose of it. That means the closing statement, the land split, and every improvement invoice stay for as long as the owner holds the property, plus the years after the sale. The wider list is in what records the IRS requires.
Hand the books over when keeping them costs more hours than the business can spare, or when they stop agreeing with the bank.
Rental-property bookkeeping is not a service Excite Tax lists yet; bring these records to whoever prepares the owner's return.
Ranked and explained on the sources page.