Rental Property Bookkeeping: Spreadsheet, Software or Bookkeeper?

What does rental property bookkeeping have to show, whatever system holds it?

Your records must establish every item of rental income and every deduction on your return, and the choice of system is yours. Anyone subject to income tax must keep permanent books or records sufficient to establish gross income, deductions and credits (26 CFR 1.6001-1). The IRS says you may use any system suited to the business that clearly shows income and expenses, and that proving each entry is your burden (Publication 583; IRS recordkeeping). Publication 583 is written for businesses, and whether a rental is a business depends on the facts; the Schedule E instructions separately require records that support every item on the schedule.

You must use the same accounting method to figure your taxable income and to keep your books (Publication 583), so check that each report your software produces uses the method you file on. Most individuals use the cash method: rent counts in the year received and expenses in the year paid (Publication 527).

Choose by what the books must produce, not by the number of homes alone: a balance sheet, separate books for each LLC, or a report for a lender or preparer points to the software and bookkeeper rows below, as the second example shows with eighteen homes in two LLCs.

A rental setup is not simple when properties sit in several LLCs or with co-owners, a lender wants a profit and loss statement or a balance sheet, your preparer keeps asking for numbers, you are about to switch systems, the books are behind, or the numbers will not tie to the bank. The sections below say where each setup stops.

Gather first: a list of the properties; statements for every loan; each purchase closing statement; the leases and a list of deposits held; the last filed return; and statements for every bank and card account that touched a rental.

Is a spreadsheet enough for my rental properties?

A spreadsheet can be enough when it shows each property's income and expenses for the year, agrees with the bank every month, and is backed by separate loan, deposit and asset records. The IRS does not rule out any format: every requirement for paper books also applies to electronic records (IRS: what kind of records; Publication 583). That publication says a single-entry system, which records the flow of income and expenses, can be simple and practical when a small business is starting out.

A spreadsheet with a tab per property stops working when:

Publication 583 does not mention spreadsheets, so it does not settle how its computerized-system tests apply to a workbook. A read-only copy of each closed year is a simple control. For spreadsheets in any small business, see bookkeeping in a spreadsheet.

What does a rental set of books need beyond income and expenses?

A rental set of books also tracks money that is not income or expense: loan principal, tenant deposits, the cost of each property and its improvements, and the owner's own money. Schedule E lists only income, expenses and depreciation for each property (Publication 527), so these items do not appear on it as such, yet the figures that do appear depend on them.

The IRS also says to keep accurate records of every item that affects basis (Publication 551). For entering a purchase, see the rental closing statement in the books; for deposits, see security deposits in rental books.

When do I need accounting software to track rental income and expenses?

Accounting software fits when the books need a balance sheet as well as a list of income and expenses: loans, deposits held, assets to depreciate, more than one entity, or a lender or preparer who wants reports. Publication 583 describes a double-entry system as self-balancing, with asset, liability and net worth accounts kept open permanently, and says it has built-in checks and balances (Publication 583).

Any computerized system must produce legible records that support the return. Its records must reconcile with the books and return, and you must keep a description of the system, including the chart of accounts (Publication 583). Any program should tag each transaction to one property, hold loans, deposits and fixed assets as balance-sheet accounts, and keep owner money apart from income and expenses. Two more checks are worth making; the first reflects what the IRS asks for in examinations, the second is a control, not an IRS requirement:

• It exports the complete file, and you can keep a copy after you stop paying for it. The IRS says examiners will request the accounting software's backup file in the majority of cases where the books are kept in software, though a narrow audit may not need it, and that its integrity tests cannot adequately be run on records converted into spreadsheets (IRS FAQ).
• It can close a filed year so the year cannot be changed unnoticed.

With several entities, keep each one's accounts, loans and owner money apart; an owner of more than one business should keep a complete and separate set of books for each (Publication 583). See books for an LLC per rental property. No official source ranks programs. To choose between them, see choosing between general accounting programs; for what to keep when you cancel one, see records to keep when cancelling accounting software. For account setup by property, see chart of accounts for rental property.

What should a bookkeeping app for landlords track?

A landlord app is a full set of rental books only if it records more than money in and money out. No IRS source names or ranks an app, so test any rental software against what the records must hold:

An app that records only money in and out leaves the loan balance, deposits held, property cost and depreciation to be kept elsewhere, in a loan sheet, a deposit list and an asset list. The depreciation history is a record the return depends on; if it is gone, see rebuilding a missing depreciation schedule. Free or paid, test an app the same way, and check the bank lines it sorts for you against each statement.

What does a bookkeeper do each month for a rental owner, and what stays with me?

A bookkeeper can do the monthly work of keeping the books, but the duty to keep adequate records, and the burden of proving the return, stay with the taxpayer. The IRS says taxpayers are responsible for maintaining sufficient books and records to support their returns (IRS FAQ; 26 CFR 1.6001-1). A bookkeeper keeps and reconciles the books; the return and any tax election are decided with your preparer.

Whoever keeps a rental owner's books, you or a bookkeeper, has these monthly jobs:

A bank line shows who was paid, not what was bought or which property it served, and proof of payment alone does not establish a deduction (Publication 583). That is why the documents and the explanations stay with you. More properties, entities, accounts and monthly transactions mean more to record and reconcile, and back years add catch-up work.

For the cost, see what a monthly bookkeeper costs. To weigh doing it yourself, see do it yourself or hire. To review a bookkeeper, see checking a bookkeeper's work. Whether each property or LLC needs its own bank account is in a separate bank account for each rental.

How do I make any system match Schedule E, one column per property?

Keep every income and expense row by property, because Schedule E has a column for each rental. Part I lists each property's address and type and its fair rental days and personal-use days, then rents, expenses and depreciation in columns A, B and C. With more than three properties, you attach as many Schedules E as you need and put the combined totals on one (Schedule E instructions).

The entity decides the form. A single-member domestic LLC is generally not a separate entity for income tax, so its rental goes on the owner's Schedule E (Schedule E instructions). A domestic LLC with two or more members is generally classified as a partnership unless it elects corporation treatment (IRS: LLC); the IRS accepts either treatment for an LLC owned only by spouses as community property (Revenue Procedure 2002-69). A partnership generally reports rental real estate on Form 8825, which also uses a column for each property, four to a page (Form 8825 instructions). A change in members flips the form: a one-member LLC that gains a second member is a partnership from then on, and a partnership reduced to one member becomes disregarded (26 CFR 301.7701-3(f)). Either way the books report by property. See books for an LLC per rental property, spouse and family LLCs and co-owned rentals: Schedule E or partnership return.

If a property manager collects your rent, the manager's monthly statement shows net figures; see turning the owner statement into Schedule E numbers.

How do I move from a spreadsheet to accounting software without losing history?

Pick a clean start date, load opening balances for every bank account, loan, deposit and asset, and keep the closed spreadsheet with that year's records. The first day of a tax year is cleanest, because each return then comes from one system. A mid-year switch means one year's Schedule E draws on two sets of records; see switching accounting software mid-year.

1. Close the old year. Reconcile every bank and card account to its statement at the switch date.
2. Save the spreadsheet. Keep a read-only copy with that year's records. It is the original record for the old period and supports the return.
3. Collect opening balances from documents, not memory. Use the closing bank reconciliation for cash, including outstanding checks and deposits in transit; each card and lender statement for debts; the deposit list for deposits held; and the closing statements and last depreciation schedule for each property's cost and depreciation to date. Equity is assets less all liabilities (Publication 583). Investigate any difference instead of posting it to equity. For a partnership, carry each partner's closing capital separately and keep the preparer's tax-basis capital records (Form 1065 instructions).
4. Enter balances, not old transactions. Bring detail across only where a report needs it. Carry uncleared checks and deposits as reconciliation items, so their later clearing does not create new income or expense.
5. Keep the same accounting method. Moving from cash to accrual changes your accounting method and generally needs IRS approval (Publication 538).
6. Check the first month. Loan balances should match lender statements, and cash should equal the bank balance after allowing for uncleared checks and deposits.

For the opening-balance mechanics, see opening balances after changing accountants.

How long do I keep rental records, and are electronic copies enough?

Keep the records behind a return item until the period of limitations for that return runs out, generally 3 years after the later of the filing date and the return's due date, because a return filed early counts as filed on its due date (IRS; Topic 305). A partnership, including a multi-member LLC taxed as one, usually keeps its records 3 years from the later of the due date and the filing date of each partner's return as well as its own (Form 1065 instructions).

Purchase, improvement and depreciation records for a rental stay until the period runs out for the year you dispose of the property in a taxable disposition, such as a sale. After a nontaxable exchange, keep the old property's records too, until it runs out for the year you dispose of the new property. The other periods, including 6 years when unreported income is more than 25% of the gross income shown, are in how long to keep business records. Keep copies of filed returns too. Lenders and insurers may require records longer than the IRS does (Publication 583).

Electronic copies are enough only if the storage system meets the same IRS tests as paper books, including producing legible records on request. You may destroy the paper originals only after the system has been tested and procedures ensure it keeps complying (Publication 583). For receipts, see scanned receipts instead of paper and rental property records and receipts.

What do I hand my preparer at year end?

Give your preparer the books and the documents they rest on, not only a printout. Schedule E and the records behind it (instructions) need:

• Each property's address, type, days rented at fair rental value, and personal-use days.
• A profit and loss by property for the year, agreed to the bank statements.
• Each lender's year-end statement or Form 1098, for interest paid.
• Property tax and insurance bills.
• The closing statement for any property bought or sold, and invoices for any improvement.
• The asset list: cost, land and building split, date ready for rent, depreciation taken, and prior Forms 4562; for a former home, its value when it became a rental.
• Deposits held at year end, by tenant.
• Names and addresses of workers paid for services and what each was paid; see Forms 1099 for landlords.
• Any property manager's annual statement, and platform payout reports.
• If you may rely on the rental safe harbor for the qualified business income deduction, which turns on hours of rental services: separate income and expense records for each rental real estate enterprise, and logs made at the time of the hours, services, dates and who did the work. A statement must be attached to a timely filed original return (Revenue Procedure 2019-38; IRS).
• Last year's return.

For the year-end steps in the books, see the year-end close checklist.

Example

These examples are illustrative; amounts are in US dollars.

Three condos, one owner, a spreadsheet

An owner has three condos with $5,400 of monthly rent in total, one loan on each and no lender asking for reports. The workbook has a tab per property with rent and expenses in the Schedule E rows, a loan sheet that splits each payment into interest, principal and any escrow from the lender's statement, a deposit list, and an asset tab with cost, land share and depreciation. Each month the totals are agreed to the bank statements. A tenant's $1,800 deposit, to be returned at the end of the lease, goes on the deposit list, not in rent. At year end, the three tabs fill columns A, B and C of one Schedule E.

Eighteen homes in two LLCs and a lender's request

An owner has eighteen homes in two LLCs, $40,000 of monthly rent in total, and a lender asking for a profit and loss statement. A spreadsheet can no longer be agreed to the bank balances, or to the loans and deposits of two entities. The owner moves to accounting software with a set of books for each LLC, every transaction tagged to a property, and a monthly bookkeeper who reconciles each account. The lender's profit and loss comes from the books. Whether the return uses Schedule E or Form 8825 depends on how many members each LLC has and on any tax election; either way the numbers are by property.

A switch on January 1

An owner moves from a spreadsheet to software on January 1. On December 31 every bank account is reconciled and the spreadsheet is saved read-only with that year's records. Opening balances come from the closing bank reconciliation with its uncleared checks and deposits, each lender's year-end loan statement, the deposit list, and the asset tab with the last depreciation schedule. Opening equity is assets less liabilities, and any gap is investigated, not posted to equity. The first profit and loss by property covers January alone, and the old spreadsheet stays on file for the old year.

Different for you?

• You have outgrown one tab per property: several LLCs, a lender asking for a profit and loss statement or a balance sheet, a preparer who keeps asking for numbers, or a coming switch of systems. What the setup must track, who keeps it each month and how history carries across depend on your entities, loans and software. This is where bookkeeping help fits; see also a profit and loss for a lender.
• Your rental books are behind, or years are missing: see catching up on rental property books; rebuilding several years is where bookkeeping help fits.
• The properties sit in LLCs or with co-owners: see books for an LLC per rental property and rental property in an LLC.
• You are switching in the middle of a year: see switching accounting software mid-year, then bookkeeping help for carrying the history across.
• You live outside the US, or the rental is outside the US: see US rentals owned from abroad and renting out a home abroad; books across two countries are where bookkeeping help fits.
• A platform or property manager pays you: see platform payouts, gross or net and the manager's owner statement.
• Receipts or the depreciation history are missing: see rental property records and receipts and missed depreciation on a rental.