what records should i keep for tax purposes?

Because of the complex nature of real estate investor taxes, you should keep complete and detailed records of all important documents, income and expenses throughout the year in order to take advantages of the many available tax deductions.  Knowing what records to keep for tax purposes can save you money and stress! 

Keeping detailed records can help you for many reasons:

•  It will make it much easier to file your taxes.
•  Having everything recorded will prevent you from missing out on deductions and save you money!

• Having a spreadsheet you can quickly pull up, will easily tell you how much you paid that contractor on July 17th, instead of guessing “I think I paid him $800 in May?”.

• In case you are audited or the IRS has any questions, you will have the proof to back up your claim.  Without documentation, you will be spending time and money trying to find the proof.  Worse yet, if you cannot come up with a receipt, you may have to pay additional taxes and penalties.

---

WHAT RECORDS SHOULD I KEEP TRACK OF?
 
The short answer is EVERYTHING!  The IRS is notorious for auditing small businesses, especially those that show a loss in consecutive years.

Also, many IRS Agents do not understand the tax nuances that apply to real estate investors, making them more likely to question your filing.  You will need to have proof if the IRS questions any of your items or even in the everyday course of business, if someone tries to question a payment.

You need to keep PERMANENT RECORDS and SHORT-TERM RECORDS.

PERMANENT RECORDS: 

• All tenant leases. 
• Any sort of legal documents – fines, inspection reports, court appearances.
• Any type of permit you have taken out on the property.
• Anything you would depreciate – such as property or improvements.
• If your company is an LLC, LP, S Corporation or other, keep all records pertaining to such.
• Insurance policies.
• ​Loan documents – such as mortgages.
• Past years taxes.
• Property title/deed.

---

• SHORT TERM RECORDS:

 
Not just a couple of months, but you will want to keep any documents you deem important enough to claim on your taxes for a minimum of 5 years. 
 
Keep anything that counts as income or an expense for the given tax year, such as:

• ​Advertising costs for your business or property.
• Entertainment expenses – such as dinners or lunches for current or potential customers or business associates. 
• Interest paid on mortgage and any credit cards for business use.
• Legal/professional fees – for accountants, lawyers, insurance agents, Realtors.
• Office expenses – Internet, 2nd phone line for business, office supplies, home office deduction if you have a home office used solely for business.
• Rent received.
• Repairs.
• Security Deposits received – When a tenant’s Lease ends, if you keep part of the deposit, you must record it as income.  If you keep some of it to pay for repairs, the money you spend on the repair is considered an expense, which you can deduct on your taxes.
• Travel expenses for business – such as miles drive for rental activities.
• Utilities paid.
• Wages paid to employees or independent contractors.

---

HOW SHOULD I KEEP TRACK OF MY RECORDS?
 
You should keep a digital copy (computer) and/or a hard copy (paper) of all your records.
 
DIGITAL COPY:
 
You will want to use a program such as Quicken or just create a spreadsheet with Excel.  You should do this as soon as the income comes in or the expense occurs.  Include as much detailed information as possible – the date, time, who you paid or who paid you, what the income or expense was for and the amount.  Also include method of payment – cash, check number, credit card, money order, etc.

Some software programs will link directly to your bank accounts and will record your income and expenses for you.  However, a simple spreadsheet will do the job.  You should set up separate records/spreadsheets for each property, for each type of expense and for separate types of income.  The point is to record as much information as you can at the time of the transaction, so you can easily create financial reports in the future.  It is MUCH easier to keep records as you go than it is to dig them up for recording, at a later date.
 
You should always back them up on CD or an external hard drive and even with a paper copy.  They should be printed out at the end of every month and/or at the end of the year.

HARD COPY:
 
You will want to make sure you have a paper copy of your most important documents.  If possible, you will want to store them in a fire-retardant filing system or safe deposit box.  If you cannot find one large enough for all your files, keep the most important ones, such as titles to the property in this box.  Organize everything by year and then alphabetically sort the files so they are easy to find.

Just a bit of organization along the year will save you money and reduce stress at tax time!