Introduction
As a rental property owner, it’s important to have a solid understanding of rental property accounting. Properly tracking your income and expenses can help you make informed decisions about your property, ensure compliance with tax laws, and maximize your profitability. In this article, we’ll cover the basics of rental property accounting and provide some tips and strategies for keeping your accounts organized and up-to-date.
Setting up a Rental Property Accounting System
The first step in rental property accounting is setting up a separate bank account specifically for your rental business. This will help you keep track of your income, expenses, and make it easier to manage your finances. You should also consider using software or hiring a professional property management company to help you manage your accounts.
Using software can make it easier to track your income and expenses, generate reports, and stay organized. There are many options available, ranging from basic spreadsheets to more advanced accounting software. For example, QuickBooks is a popular accounting software that offers features such as income and expense tracking, invoicing, and tax preparation.
Alternatively, you can hire a professional accountant to handle your rental property accounts. This can be especially helpful if you are new to rental property ownership or if you have multiple properties to manage. An accountant can handle all aspects of your rental property accounting, including tracking income and expenses, preparing tax returns, and providing financial advice.
Recording Rental Income
It’s important to track all rental payments received from tenants, including any security deposits or advance rent payments. You should also keep detailed records of any additional income you receive from the property, such as late fees or pet rent. All of this income should be recorded in your rental income account. Did you also know that you can guarantee rent?
For example, let’s say you own a rental property that you rent out for £1,200 per month. In addition to the monthly rent, you also require a £400 security deposit from your tenants. During the year, you also charge your tenants a £160 pet fee and a £80 late fee. Your total rental income for the year would be £1,200 x 12 months + £400 + £160 + £80 = £17,920.
Keep copies of all rental agreements, receipts, and other documentation related to your rental income. This will make it easier to track your income and provide documentation if you are audited by HM Revenue and Customs (HMRC).
Reporting Rental Income to the HMRC
According to HMRC, you must report all rental income on your tax return, even if it is not received in cash. This includes bartering arrangements or other non-cash exchanges.
For example, let’s say you own a vacation home that you normally rent out to tourists. However, one year you decide to exchange your vacation home for another rental property owned by a friend. Under this bartering arrangement, you would still need to report the value of the vacation home as rental income on your tax return.
If you receive rental income in a foreign currency, you’ll need to convert the amount to pounds before reporting it on your tax return. You can use the exchange rate in effect on the date you receive the income or the average exchange rate for the year.
Deducting Expenses from Rental Income
You can also deduct certain expenses related to the rental property from your income to calculate your net rental income. These expenses can include repairs, insurance, and property taxes. It’s important to keep detailed records of all your expenses, as you’ll need to provide documentation if you are audited by the HMRC.
Here are some examples of expenses that you may be able to deduct:
- Repairs: If you need to repair or maintain your rental property, you can typically deduct the cost of the repairs. For example, if you need to fix a leaky roof or replace a broken window, you can deduct the cost of the materials and labour. However, you can’t deduct the cost of improvements that increase the value of the property.
- Insurance: You can typically deduct the cost of insurance for your rental property, such as homeowners insurance or landlord insurance.
- Property taxes: If you pay property taxes on your rental property, you can typically deduct the amount you pay.
- Advertising: If you advertise your rental property to attract tenants, you can deduct the cost of the advertising.
- Legal and professional fees: If you hire a lawyer or other professional to handle matters related to your rental property, you can typically deduct the fees you pay.
There are some rules to be aware of when it comes to deducting expenses. For example, you can only deduct expenses that are “ordinary and necessary” for the operation of your rental property. You can’t deduct personal expenses, such as your commute to and from the property, or the cost of improvements that increase the value of the property.
Paying Taxes on Rental Income
If your property is classified as a personal residence or vacation home, you may be able to exclude a portion of the rental income from tax. However, in most cases, you’ll need to pay taxes on the net rental income. The tax rate will depend on your taxable income and filing status.
For example, let’s say you own a rental property that generates £30,000 in rental income and has £10,000 in expenses. Your net rental income would be £30,000 – £10,000 = £20,000. If you are in the 22% tax bracket, you would owe taxes of £20,000 x 22% = £4,400 on your net rental income.
It’s important to understand the rules for paying taxes on rental income and to file your tax returns accurately and on time. If you are late in filing your tax returns or if you underreport your rental income, you may be subject to penalties and interest charges.
Here is a overview table for your consideration:
|
Item |
Description |
|
Income |
Rental payments received from tenants, including any security deposits or advance rent payments. Also includes any additional income from the property, such as late fees or pet rent. |
|
Expenses |
Repairs, insurance, property taxes, advertising, legal and professional fees, and other expenses related to the operation of the rental property. |
|
Depreciation |
The amount of your property’s value that you can deduct each year due to wear and tear. This is typically calculated using HMRC guidelines and can be claimed as an expense on your tax return. |
|
Capital improvements |
Improvements that increase the value of your property, such as adding a new roof or finishing a basement. These expenses can’t be deducted as a current expense, but they can be added to the basis of your property and claimed as a deduction when you sell the property. |
|
Bank account |
A separate bank account specifically for your rental business / property, to help you keep track of your income and expenses and manage your finances. |
|
Software |
Accounting software or other tools to help you track your income and expenses, generate reports, and stay organized. |
|
Professional accountant |
A professional accountant handles your rental property accounts, including tracking income and expenses, preparing tax returns, and providing financial advice. |
|
Rental agreements |
Copies of all rental agreements with tenants, to help you track your income and provide documentation if you are audited by the HMRC. |
|
Receipts and documentation |
Receipts and other documentation related to your rental income and expenses, to help you track your income and provide documentation if you are audited by the HMRC. |
|
Rental activity |
A record of the activity related to your rental property, including dates of occupancy, rent paid, and any issues or problems that arise. This can be helpful for tracking your income and expenses, as well as for communicating with tenants and addressing any issues that come up. |
|
Property management fees |
If you hire a property management company to handle the day-to-day management of your property, you can deduct the fees you pay as an expense. |
|
Travel expenses |
If you incur travel expenses related to your rental property, such as the cost of traveling to the property to make repairs or show it to prospective tenants, you may be able to claim these as deductions. |
Tips for Managing Your Accounting for your Rental Property
Here are some tips for managing your rental property accounting:
- Consider hiring a property management company: If you have multiple properties or if you live far from your rental property, it may be more efficient to hire a property management company to handle the day-to-day management of the property. You can then deduct the fees you pay to the property management company as an expense.
- Keep track of your depreciation: As a rental property owner, you can claim a deduction for the depreciation of your property over time. This is typically calculated using HMRC guidelines, and you can claim the deduction as an expense on your tax return. Keep track of the depreciation of your property to ensure that you are claiming all the deductions you are entitled to.
- Set aside money for repairs and maintenance: As a rental property owner, you’ll need to budget for repairs and maintenance on your property. Consider setting aside a portion of your rental income each month specifically for this purpose. This will help you cover unexpected repairs and ensure that your property is well-maintained.
- Keep good records of your capital improvements: If you make any improvements to your rental property that increase its value, such as adding a new roof or finishing a basement, you can’t deduct the cost of these improvements as an expense. However, you can add the cost of the improvements to the basis of your property, which can reduce your capital gains tax when you sell the property. Be sure to keep good records of all your capital improvements so you can claim this deduction when you sell the property.
- Take advantage of tax credits and deductions: The UK government offers various tax credits and deductions for rental property owners. For example, you may be able to claim the Rent a Room Scheme, which allows you to earn up to £7,500 per year tax-free from renting out a furnished room in your home. You may also be able to claim the Landlord’s Energy Saving Allowance, which allows you to claim a tax deduction for the cost of certain energy-efficient improvements you make to your rental property. Keep track of these credits and deductions to ensure that you are claiming all the tax benefits you are entitled to.
Conclusion
Rental property accounting is a crucial aspect of managing a successful rental business. By tracking your income and expenses, staying up-to-date with tax laws and filing requirements, and keeping your accounts organized, you can ensure compliance and maximize your profitability.
It’s worth noting that rental property accounting can be complex, and it’s
always a good idea to seek the advice of a professionals.
