Real estate investing can be incredibly rewarding—but only if your books are in order. Whether you own a single rental or a multi-state portfolio, clean bookkeeping is the difference between “I think we’re profitable” and “I know our net cash flow, tax exposure, and next move.” This guide shows you—step-by-step—how to track rental income, categorize expenses, and handle depreciation so your numbers are tight, your taxes are lighter, and your growth plan is crystal clear.
Why Bookkeeping Determines Your ROI
Profit isn’t cash—and why that matters
Cash in the bank feels great, but profit on the books is what lenders, partners, and buyers evaluate. You can show profit yet be cash-poor (heavy principal payments) or show a loss yet be cash-rich (thanks to depreciation). Good bookkeeping keeps those lines untangled so you see the whole picture.
The IRS loves clean records (and so does your lender)
Accurate ledgers mean fewer surprises at tax time and smoother conversations with underwriters. Clean general ledgers (GL), reconciled statements, and a tidy fixed-asset schedule shorten loan approvals and reduce audit risk.
How to Structure Your Books by Property
Separate entities, accounts, and cards
Open a dedicated bank account and credit card for each entity (and, if practical, per property or property class). Never mix personal and rental funds. This alone prevents a world of pain.
Chart of accounts for rentals
Set up a chart of accounts that mirrors how you operate and report:
Sample categories
- Income: Rent, Late Fees, Pet Fees, Parking, Laundry, Other Income
- COGS/Direct Costs (for STRs): Cleaning, Turnover Supplies, Platform Fees
- Operating Expenses: Mortgage Interest, Property Taxes, Insurance, Repairs & Maintenance, Property Management, Utilities, Professional Fees (Legal/Accounting), HOA/Condo Dues, Advertising, Licenses & Permits, Bank Charges, Postage & Delivery, Office Supplies, Software Subscriptions, Travel/Mileage
- Assets: Buildings, Land (non-depreciable), Furniture/Appliances, Leasehold Improvements, Vehicles (if applicable)
- Liabilities: Security Deposits Held, Mortgage Payable, Credit Cards, Escrow Payable (Taxes/Insurance)
Tracking Rental Income the Smart Way
What counts as income (beyond monthly rent)
Record every inflow that’s not a true deposit: rent, pet rent, parking, storage, laundry, application fees, utility reimbursements, and late fees. Track income by property (and unit if possible) to monitor performance and delinquency.
Cash vs. accrual accounting
- Cash basis: You record income when received and expenses when paid. Simple and common for small landlords.
- Accrual basis: You record when earned/incurred, regardless of cash movement. Useful for portfolios that want more precise period matching (e.g., tracking accounts receivable from tenants).
Handling partial payments, late fees, and concessions
- Record partial payments as income and the remaining balance as A/R—Tenant.
- Record late fees separately so you can see how often they’re triggered.
- Concessions (discounts or free months) should be tracked to analyze marketing effectiveness.
Security Deposits—Asset, Liability, or Income?
Recording deposits and refunds
Security deposits are liabilities (money you owe back). When collected, debit cash and credit Security Deposits Held. When refunded, reverse the liability. If you keep part for damages, move that portion from Security Deposits Held to Tenant Damage Income (or an offset of repair cost), and record the corresponding repair expense.
Forfeitures and damages
If a deposit is forfeited per lease terms, it becomes income when legally recognized (often at move-out after reconciliation). Keep documentation (move-in/move-out checklist, photos, invoices).
Operating Expenses You Can (Usually) Deduct
The big seven to watch
- Mortgage Interest (principal is not deductible; it reduces the loan balance).
- Property Taxes (paid from escrow or directly).
- Insurance (property, liability, umbrella).
- Repairs & Maintenance (non-capital).
- Property Management Fees (including leasing commissions if expensed).
- Utilities (owner-paid water, sewer, gas, electric, trash).
- Professional Fees (legal, accounting, bookkeeping).
Always store digital receipts and memo the property/unit. Consistency beats perfection.
Repairs vs. improvements—how to tell the difference
- Repairs keep the property in its ordinary operating condition (fixing a leak, patching drywall). Deduct in the year paid/incurred.
- Improvements better the property, extend its life, or adapt it to a new use (new roof, HVAC, kitchen remodel). Capitalize and depreciate.
Safe harbors that help
- De Minimis Safe Harbor: You can expense items ≤ $2,500 per invoice or item (assuming a proper accounting policy).
- Routine Maintenance Safe Harbor: Certain recurring activities you expect to perform more than once during a 10-year period (e.g., annual servicing).
(Work with a tax pro to apply these correctly.)
Capital Improvements & Depreciation Basics
Residential 27.5 years vs. commercial 39 years
- Residential rental buildings generally depreciate over 27.5 years.
- Commercial buildings over 39 years.
Land is not depreciable. Allocate purchase price between land and building (via appraisal, tax assessment ratio, or an allocation method you document).
Mid-month convention and placed-in-service
Real property typically uses the mid-month convention—depreciation starts halfway through the month you place the asset in service (when it’s ready and available to rent). Track this date carefully; it drives the first-year deduction.
Cost Segregation—When It Makes Sense
Accelerating depreciation
A cost segregation study breaks your building into components with shorter lives (e.g., 5, 7, 15-year property like carpets, appliances, certain land improvements). This can front-load deductions and increase early-years cash flow—often valuable for investors planning renovations, acquisitions, or refinances.
Passive loss rules and recapture (high level)
Accelerated depreciation can create large paper losses. Those losses may be passive and limited depending on your participation and income level. Also, when you sell, some deductions can be recaptured (taxed), so plan exits with your CPA.
Fixed Asset Register—Your Depreciation Control Center
What to track
Maintain a fixed asset register with: asset name, description, property, date placed in service, cost, assigned class life, depreciation method, convention, accumulated depreciation, and net book value.
Disposals, partial dispositions, and 1031 exchanges
When you sell or scrap an asset (e.g., replace a roof), record the disposition and remove remaining basis as allowed. For full property sales, track adjusted basis to measure gain, including §1250 depreciation recapture. If doing a 1031 exchange (like-kind exchange), keep meticulous records of relinquished and replacement property, boot, and dates. (This is overview only—coordinate with a qualified intermediary and tax pro.)
Loan Accounting, Escrow, and Interest
Breaking out principal vs. interest
Your mortgage payment includes principal, interest, and often escrow. Only interest is deductible as an expense. Principal reduces the Mortgage Payable liability. Book each component correctly monthly.
Recording escrow for taxes and insurance
Treat escrow as an asset (Escrow—Taxes/Insurance). When the bank pays taxes or insurance from escrow, reduce that asset and record the applicable expense. Reconcile escrow statements at least annually.
Mileage, Travel, and Home Office
What qualifies and how to document
Trips to manage, repair, or inspect properties can be deductible. Maintain a contemporaneous mileage log (date, purpose, start/end odometer). Keep receipts for tolls/parking.
Standard mileage vs. actual
You can use the standard mileage rate or actual expenses (fuel, maintenance, insurance, depreciation). Choose one method consistently per vehicle rules and keep great records. A home office used regularly and exclusively for management can unlock additional deductions and simplify mileage calculations (from home office to property often counts as business mileage—confirm with your tax pro).
Short-Term Rentals (STRs) vs. Long-Term Rentals
Average stay and different treatment (overview)
If the average stay is 7 days or less, or substantial services are provided, an STR may be treated differently for tax purposes than a traditional rental. This can affect loss limitations, self-employment tax, and what counts as COGS. For bookkeeping, create separate income/expense categories for STR-specific costs.
Recording cleaning fees, platform fees, and occupancy taxes
- Cleaning/turnover: Direct expense (COGS for STRs).
- Platform fees (Airbnb/VRBO): Selling or platform fees.
- Occupancy taxes: Track by jurisdiction. If platforms remit on your behalf, record net payouts correctly.
1099s, W-9s, and Working with Contractors
When you must issue 1099-NEC
If you pay a non-employee contractor $600 or more in a year for services, you likely need to issue a Form 1099-NEC. Collect Form W-9 before the first payment so you have their legal name, address, and TIN.
W-9 collection workflow that saves headaches
- Add “W-9 on file?” as a required onboarding step.
- Store signed W-9s securely in your document system.
- Use accounting software or a 1099 service to e-file in January.
Month-End Close—A Simple 60-Minute Checklist
Reconcile and review
- Reconcile each bank and credit card account.
- Match rent roll to income recorded; chase delinquencies.
- Scan large “Repairs & Maintenance” for items that should be capitalized.
- Update the fixed asset register for any new improvements.
- Review A/P and upcoming bills (taxes, insurance, debt).
- File receipts and invoices to your document hub (by property → year → month).
- Export a P&L and Balance Sheet by property to track KPIs.
Flag capex vs. repairs before year-end
It’s far easier to decide treatment now than scramble in March. Add a simple memo to each big invoice—“repair” or “capital improvement” with your reasoning.
The Reports You Actually Need
P&L by property
This reveals which doors carry the portfolio and which are lagging (or masking losses). Compare YoY and against budget.
Cash flow statement (12-month trailing)
Cap rate won’t save you if cash flow is tight. A trailing cash flow report shows seasonality, tax and insurance spikes, and the real timing of money.
Balance sheet and debt schedule
Your balance sheet shows leverage, equity, escrow balances, and deposits held. Maintain a separate debt schedule (loan, rate, maturity, amortization, covenants). Lenders love this.
Tax Season Prep Without the Panic
Forms and schedules you’ll likely touch (high level)
- Schedule E for rental income/expenses (most long-term rentals).
- Form 4562 for depreciation (and fixed asset schedule).
- Form 8582 for passive activity loss limitations (if applicable).
- 1099-NEC filings to contractors.
- State/Local returns and occupancy taxes for STRs.
Save HUD-1/closing disclosures, mortgage interest statements, property tax bills, and capital improvement invoices in a clean, dated folder structure.
Depreciation reports and carryovers
Keep last year’s depreciation schedule handy. Track carryforward losses, passive losses, charitable carryforwards, and suspended losses from prior years so your preparer can apply them correctly.
Recommended Tools & Simple Tech Stack
Core accounting and landlord tools
- QuickBooks with class tracking (one class per property) or location tracking for portfolios.
- Stessa (built for landlords—automates imports and reporting).
- Buildium / Rentec Direct (great for larger portfolios needing tenant portals, maintenance tickets, and trust accounting).
Receipt capture + storage
Use mobile receipt capture (e.g., QuickBooks app or third-party) and store PDFs in a naming scheme: Property_Unit_YYYY-MM-DD_Vendor_Amount_Purpose.pdf. Consistency makes audits and refis painless.
Final Playbook: 10 Rules for Rock-Solid Real Estate Books
- One bank/credit card per entity—no personal swipes.
- Record income by property (and unit)—rent, fees, reimbursements.
- Treat security deposits as liabilities until settled.
- Categorize weekly; reconcile monthly.
- Split mortgage payments: principal, interest, escrow.
- Label big invoices as repair or improvement—don’t guess later.
- Maintain a fixed asset register with placed-in-service dates.
- Keep W-9s on file and issue 1099-NECs in January.
- Run P&L and cash flow by property every month.
- Partner with a real-estate-savvy bookkeeper/CPA—your ROI will thank you.
Conclusion
Real estate is a numbers game—and your books are the scoreboard. When you track income by property, record expenses with discipline, and treat improvements and depreciation correctly, you’ll know exactly where your profit comes from and how to scale it. Keep your month-end close simple, your fixed asset schedule current, and your documents tidy. Do that, and tax season stops being a fire drill—and starts becoming part of your strategy.
FAQs
1) What’s the easiest way to separate property performance?
Use classes or locations (one per property) in your accounting software. Then run P&L by class. For STRs, also track platform fees and cleaning as direct costs.
2) How do I split my mortgage payment properly?
Use the lender statement: post interest to expense, principal to Mortgage Payable, and escrow to an Escrow Asset. When taxes/insurance are paid from escrow, reduce the asset and book the expense.
3) Can I expense a $1,900 appliance or should I capitalize it?
Often you can expense it under the de minimis safe harbor (≤ $2,500 per item/invoice) if you have a written policy and apply it consistently. When in doubt—or for bundled invoices—ask your CPA.
4) What’s the difference between repairs and improvements?
Repairs restore things to working order; improvements better or extend life. Repairs are typically deductible now; improvements are capitalized and depreciated. Keep memos and photos to support your treatment.
5) Do I have to issue 1099s to every contractor?
If you paid a non-employee $600 or more for services in the year, you’ll typically need to issue a 1099-NEC. Collect Form W-9 before paying the first invoice so filing is painless.