Filling out the actual paper forms to do your taxes (yes, I do it the old-fashioned way, on actual paper), isn’t hard. What is hard, is keeping track of your expenses throughout the year, so that you know what to put on those forms.
Throughout the year, I keep track of the following for my duplex expenses:
- Invoices from contractors, repairmen
- Receipts from hardware stores, appliance stores, Home Depot, etc.
- Water bills
- Gas Bills
- Cell phone bills
- Rental license fees
- Advertising costs
- Tenant Screening costs
- Cleaning or office supplies directly related to the duplex and its management
- Mortgage Interest (half of my total, since I’m owner-occupied)
- Home Insurance Premiums (also half)
- Mileage for all duplex-related errands
I usually pay all of my regular bills online, or by ACH withdrawal, so adding up all of this stuff at the end of the year also means opening and reading most of the mail that I’ve received during the year prior 😉 When I’m doing my taxes, I go through all of my expense from the year, and put them all into a spreadsheet, in the following categories:
For each expense, I also categorize it by date, write down the mileage incurred (if any), and whether this expense was directly related to the rental half of my duplex, or to the whole house. (Improvements to the yard would be for the whole house, where a new ceiling fan in the dining room of the rental unit is obviously for the rental unit only).
I then sort the list into two separate spreadsheets, one for “whole house” expenses, and one for rental-only expenses. When I add up the totals for each category (advertising, cloeaning/maintenance, repairs, etc.), I add the whole amount for rental-only expenses, plus half the amount for whole-house expenses. This gives me a total that I can use in my schedule E.
To figure my mileage/travel expenses, I simply add the total miles traveled (whole amount for rental-only errands, half for whole house errands), and multiply it by the yearly amount stated on the IRS website. This also gives me a number that I can use in my schedule E.
One trick I’ve learned regarding utilities — my water bill, for instance, is for the whole duplex. Initially, you’d assume that I can use half of my yearly water bill expenses on my schedule E. However, the IRS allows you to use “any reasonable method” to figure out utilities, and for me, it makes more sense to split up the total water expense based on the number of people — I have three people living in my rental unit, where only one lives in my unit. Therefore, it makes sense to use 3/4 of the yearly water bill as a rental expense, rather than just half.
The only cost I mention here that doesn’t go directly to the schedule E is improvements — those are a whole different animal, and have to be depreciated on a separate schedule. Improvements include things like kitchen remodels, adding a garage, and I believe new appliances or windows, etc. Putting them on the depreciation schedule means that you still get to deduct the expense incurred for them, but over time — over their useful life. Depreciation is a little tricky, and may require its own special post 😉