Accounting

A Guide to Creating Powerful Landlord Reports That Make Year-End Finances and Taxes Easier

By Chris Fluegge January 02, 2023

Landlord accounting is the process of recording and reporting financial information about rental properties. It is a very important aspect of being a landlord, and it is also very complicated.

Landlords need to keep track of all the income and expenses related to their rental properties. They also need to report this information to the Internal Revenue Service (IRS) and state tax authorities. Landlord accounting can be a very complicated process, and it is important for landlords to get it right. If they do not, they could end up paying too much tax, paying too little tax, getting into legal trouble, or running into any other number of accounting nightmares.

TenantCloud helps with all of the above by automating a significant part of the accounting process. However, it’s essential that a few core things are understood and adhered to in order to get the most out of TenantCloud’s accounting features so that you can set yourself up for success in the future and eliminate unnecessary accounting issues that waste your time.

Here are several things that landlords should understand and do to make sure that their accounting reports are accurate.

Understand Cash Flow for Rental Properties

Here are some quick examples of the directions in which cash flows to/from the property.

Income to the property

Rental Payments from Tenants
Tenant Fees & One-Off Payments (e.g. pet fees not hidden from the owner)
Contributions from Owner

Expenses for the property

Payment to Service Pro
Purchases at Home Depot, Lowe’s, etc for material
Property utility payments

Income to the property management entity

Direct Tenant Fees (hidden from the owner)
Management Fees

The expense for the property management entity

General Office Expenses (e.g. ink/toner, pens, paper, etc)

Income to the owner

Owner Distributions

The expense for the owner

Owner Contributions

In addition to income and expenses, there are also reserves and deposits.

Deposits

Deposits are generally held for things like pet deposits, tenant security deposits, etc., and those are not considered income until they’re applied to an outstanding balance such as an invoice for pet damages, or unpaid tenant rent.

Reserves

Reserves are generally required by law, and it is money held in escrow for the property in the event that property expenses exceed rental income for any given month. When that happens, the reserve funds can be used for emergency expenses.

For example, if the heater goes out in the middle of the winter, and you already sent a distribution to the owner, you can generally use the reserve funds to repair the heater.

The owner is then required to replenish the reserve funds so that the property has the required reserve on hand for future needs.

Understand that the Quality of the Reports Is Determined by the Quality of the Data

The information you get out is only as good as the information you put in.

Trash In = Trash Out

To help avoid putting in trash information, it’s essential that you eliminate as much room for human error as possible and automate the process wherever you can:

Focus on paying as much as possible via TenantCloud

Service Providers and Owners can all be paid via TenantCloud
Security Deposit Refunds can be paid to tenants via TenantCloud
Anything paid/refunded in TenantCloud is automatically recorded and properly accounted for

Set up automated recurring invoices

Set up both recurring income AND expense invoices
These are automatically assigned to the correct accounting categories
They’re published each month without risk of human error or forgetfulness

Encourage digital payments

They automatically get applied to the outstanding invoice
They’re automatically issued a receipt

Assign properties to bank accounts/entities

The funds automatically go to the assigned bank accounts that are associated with a specific legal entity

Set up Escrow/Liability bank accounts

Security deposit payments automatically go to these designated accounts

Set up automatic owner distribution invoicing

It will automatically take all income and expenses into consideration, and create an invoice for the distribution amount owed that month
Authorize owner distributions within the software for proper accounting

Set up automatic management fee invoicing

Management fee invoicing can be set up based on a percentage or flat fees
Be sure to include automatic renewal fees any time a lease is renewed

Set up automatic service fee invoicing

Set up the exact flat amount or percentage you charge when you handle maintenance requests that result in expenses to the property

Set up owner portals (two sets of eyes are better than one)

Give owners access to necessary reports
Give owners access to maintenance requests

Create forms inside of TenantCloud when possible

1099’s can be created in TenantCloud for owners and service providers

For the things that you are unable to fully automate, it’s important to set up good practices and make sure they’re followed at all times:

Take pictures/scan EVERY business receipt (You can attach them to invoices/payments in TenantCloud as needed)
Track mileage (e.g. mobile app)
Track material usage (e.g. log books) properly
Double-check manual accounting entries
1. If it’s a CapEx invoice, make sure it’s recorded as such
2. If it’s a one-time tenant damage fee, make sure it’s recorded as such
When an invoice is related to a maintenance ticket, create the invoice directly on the maintenance ticket for more accurate record keeping
Put notes where notes/details sections are available and are applicable

Understand the Type of Report You Need

Once you have a firm understanding of how cash flows in your rental property business, and you’ve established best practices for data entry to ensure that you’re only putting in the highest quality data – now you need to understand which reports you need, and how to properly filter them.

The most common errors that we see with reports are:

Double-check the date range that you are using
Double-check the accounting type (cash vs accrual)

These two errors are often associated with each other.

For instance, if you are pulling a report based on cash accounting, then that means the report will only pull in payments based on the date the invoice was actually paid – not based on when it was invoiced.

So for example, if you pull a Cash Accounting report from January 1 – January 31, and you are confused as to why an invoice that was created on January 1st isn’t showing up – it may be because the invoice was actually paid early on December 27th, the year prior. Because that’s when the actual cash was received, that’s where it will show up in the Cash Accounting report.

However, you can pull that same report with an Accrual Accounting filter, and now the January 1 invoice will show up, even though it was paid in December.

In that same scenario, if the invoice was created on December 27th, but wasn’t paid until January 1st, it will show up on the Cash Accounting report, but not the Accrual Accounting report.

Inspect What You Expect - Double-Check Everything

It can be frustrating when you have gone through all the proper steps, entered everything correctly (or you think you did), double-check your work, and still come out with reports that don’t seem to be accurate.

In these cases, the best way to problem solve is by doing some troubleshooting.

Half of the responsibility of a property manager is problem-solving, and when it comes to accounting, the best way to do that is to pull multiple reports and double-check the entries using multiple data points.

Just like the example above, with just one report being pulled, it would likely be impossible to determine what the issue is. But with two reports, it became easier to understand the issue. And if it’s a really difficult accounting problem to solve, sometimes a third report is the charm.

This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors for your specific business.