While important for most industries, record keeping for landlords is absolutely critical—among other things, it can keep you out of a major legal snafu! Here, on behalf of The Real Estate CPA, I provide reasons why keeping records is so essential for landlords.
Before learning more about the importance of record keeping, you should probably know what records to keep.
Obviously, you will need records pertaining to taxes—documentation that shows your rental income, as well as your expenses. Then, you need documents that provide proof of that income and those expenses. Rental income and expense documentation should be obvious, but I’ll explain anyway. Your CPA is going to need those records to do your taxes for you, and their life (and yours) will be made miserable without them. First rule of landlords: do not give your CPA reason to be mad at you! And if, for some reason, the IRS needs clarification—the dreaded audit—those records will be there to save you. Finally, you can only take the deductions that you can prove, and any CPA worth their salt will want you to get every deduction possible. So, keep those records, and make you, your CPA and your bottom line happy!
But wait, there’s more. Do you have any employees? Don’t forget those employee records! This should include payroll tax records, withholding tax records and employment tax returns. It all comes down to taxes again. You will need to provide employees with W4’s, and any questions or concerns the IRS has with their taxes may eventually come back to you. Keep clean and tidy records, and the likelihood of mistakes will drastically decrease, and if mistakes are made, you will quickly be able to correct them.
Savvy landlords will also keep files on both approved and rejected applicants. For rejected tenants, you should keep:
- Their rental application
- A credit report
- Your notes from conversations you had with them
- Their previous landlord or previous employer
- Any notes on the criteria used to determine them ineligible
- Documentation regarding any application fees or security deposits paid or refunded.
If you’re going to keep the reject pile, you also need to keep the okay pile, so add that to the list of records to keep. This group should include all of the above, plus:
- The original signed lease
- The lease package your tenant received when they moved in
- A move-in and move-out inspection checklists—with pictures, if possible
- Any other documentation created during their rental period, like repair records and receipts.
Keeping files on current and former residents is the only way to protect yourself if a tenant makes a claim against you. Whether pertaining to rent they claim they paid, a repair they claim wasn’t made, harassment they claim occurred, an unfair eviction or any other legal or rent-related problem, those records will allow you to prove, to the tenant or a court, that your version of the story is correct. Without good records, it becomes a game of your word against theirs, which is never fun to play.
When it comes to rejected applicants, the idea is similar, but to a different effect. These records will also protect you legally, but more often against claims of rental discrimination. A rejected applicant could claim that you rejected them based on their race, gender, religion, ethnicity, medical history, disability or other protected factor—and this is illegal. The only way to refute such a serious claim? Good records. Keeping detailed documentation of your interactions with the rejected applicant, as well as of your reasons for rejecting them, can help protect you in a big way.
All told, you’ll have a lot of records, preferably electronic and neatly organized. Electronic records will do a lot for your sanity, peace of mind and office organization, but I won’t hold it against you if you choose to stay old school. Either way, keep these records—rule of thumb is at least four years—no matter how time-consuming and tedious it may be. Short-term frustration equals long-term gain in the landlord world, so become a record-keeping master, and watch your landlord experience change for the better! But wait—want to make your experience as a landlord even better? That’s where we come in. Our years of expert knowledge and experience, we can help you, as a landlord, to handle any and all tax and accounting needs. You deserve a partner that can help you succeed, so let’s talk—drop me a line today!