Keep Track of Your Expenses
Keep records of every penny you spend on an investment property, entering the dollar amount and its purpose in a handwritten ledger or software accounting program. Retain your receipts for at least the number of years recommended by the Internal Revenue Service, but hold on to your written records for as long as possible so that you can refer back to them whenever you must answer a question about a property.
Typical expenses for an investment property might include the following:
Repair and maintenance
Property taxes
Mortgage interest
Utility service and garbage pickup fees
Hazard insurance
Fees charged by attorneys or property management personnel
Advertising costs
Depreciation
If you have more than one investment property, make sure you keep separate income and expense records for each one. Try to make your records as thorough as possible. When you make a payment, write the check number on the receipt, then do the reverse, listing the invoice number or other identifying information for the bill on the face of the check.
If the receipt isn't detailed, make it more complete by jotting down specifics on a piece of paper and attaching the note to the receipt. For example, a small home improvement store might give you a receipt that simply says “hardware.” Make a note that the sale was for a towel rack or a toilet seat — whatever you actually purchased, because in six months you might not remember exactly what the receipt was for.
Capital Improvements
Some items are considered capital improvements rather than expenses, and these are treated differently on your tax return. Capital improvements are items that increase the value of the structure, and they are handled differently than expenses in a tax return.
If you replace the gravel in a driveway, it's an expense. If you turn the same gravel driveway into a paved drive, it might be classified as a capital improvement. Replacing a broken window is an expense, but updating all of the windows in a house to energy-efficient versions is probably a capital improvement. Capital improvements raise the tax basis of the structure — the total amount of your investment you can claim.
