Rental Property Expenses versus Capital Improvements

As landlords enter transactions into QuickBooks, they must decide if something is an expense or a capital improvement. The impact is significant.

Example: You have a property that will earn $12,000 in gross rent this year (and $5,000 after insurance, property taxes, depreciation, etc). You bought if Jan. 1st this year for $100,000. You expect to pay taxes on the $5,000 in income.

The purchase price is generally capitalizable (some exceptions are if it was already rented and in the $100K you also received cash for the current tenant’s security deposit. Then you’d need to transfer the security deposit.) What if you need to put on a $3,000 new front porch and replace the carpet in the living room for $450? You’ll spend the money, but how do you record it in QuickBooks?

Let’s say you expense everything.

Your expected $5,000 in income is reduced to $1,550. “Great!” you may say, you pay less in taxes, because all repairs can be deducted from income in the current year. Your balance statement will not change, only your income statement. Is this correct? Is this legal?

Let’s say you capitalize everything.

You will still earn almost $5,000. You will have a more valuable asset on your balance statement, and you will have a little bit more depreciation to offset income (which is why you will be taxed on a bit less than $5,000). “Terrible!” you say, you pay more taxes and have to wait for years for depreciation to offset income which could have happened all at once if you only expensed it. Is this correct?

The problem here is capital improvements must be depreciated. The problem with depreciation is you do not get to make a full deduction to your income in the year the payment was made.

What is the right way?

Generally speaking you do not have a say in what you can expense and what you must capitalize. The tax authorities have pretty clear guidelines. Everyone in the US should at least skim Pub 527 Residential Rental Property. You still get to deduct capital improvements from income to lower taxes, but they must be spread out over the particular asset’s depreciation schedule.
The IRS explains you capitalize what “extends the useful life” of the property. Examples of capital improvements:
  • replacing a roof
  • building an addition or a garage
  • replacing all plumbing, electric, or windows
Reparts are necessary to keep a property in working condition. The IRS says they “do not add significant value to the property or extend its life.” Examples of repairs:
  • fixing a bad patch of a roof
  • repainting a room
  • replacing bad flooring

What’s a smart landlord to do?

Skim Pub 527, but don’t stop there and try to do everything yourself. Many tax strategies have been tested in court and you need to find an accountant that can help you be aggressive, but entirely in compliance with what courts ruled and the IRS requires.

For instance, you may find some tax lawyers will advise you to expense most of the costs spent to bring a rental up to service, even if these would normally be capitalized in a very strict reading of the tax law. He or she will have very specific reporting requirements for you, fortunately these are quite easy when you set up QuickBooks correctly and have an organized office.

If you must depreciate, and you are operating a profitable company, then you can optimize current year’s deductions by using an accelerated depreciation schedule instead of a straight-line schedule.

The verdict? Set a goal this year to meet several new accountants and ask them about how they optimize taxes for other landlords. First meetings will be free, and you will be able to ask lots of questions and find someone who can help you find a legal balance between capitalizing and expensing your outflows.

Want more? Read our blog for other articles (like this one previewed from the training guide) or go ahead and buy the full course right now to learn how to use QuickBooks for Landlords and Property Managers. (We have lots of screenshots of how to enter expenses and capitalized transactions.)

See pricing information for QuickBooks training for Real Estate

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Video of Landlord Accounting Training (long form)

Read happy customers’ testimonials ♥, skim through the training information, or watch the short video below. You’ll learn how QuickBooks can be easily, and correctly, set up for Landlords.

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How to convert a Tenant as a Customer into a Job in QuickBooks

We recently recommended entering Properties as Customers and Tenants as Jobs. What if you have an existing company file where your tenants were customers? Read on to learn how to convert those customers (tenants) into jobs without losing historical transaction information.

The secret is in dragging and dropping the tenant (currently as a customer) under a new customer (which you have to create, which is the job).

Here’s a video, or read on for picture instructions:


Open the Customer center. Here we have a customer “My Existing Tenant” that we want to make a job. We also created a new customer that will represent the property. In the end we want the old tenant to become a job under the new customer (property).

convert customer to job - 1

Look for the diamond next to each row in the list. Click the diamond and drag it to the right.
convert customer to job - 2

That’s it. You can double click and edit the name of the job if you wish. Now you moved the existing customer into a job under the new property (customer). This is helpful if you bought our training and are migrating an old company file into using our best practices.

convert customer to job - 3 done

Hopefully this helped. Read more from Landlord Accounting’s blog, or order the full guide now.

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Calculate Cap Rate in QuickBooks

calculate the cap rate for landlords in quickbooks Calculating Cap Rate (Capitalization Rate) for real estate investments is straightforward. We previously explained cap rate for real estate investors and landlords. Recall that Cap Rate = Net Operating Income / Value.

Here’s how you calculate the Capitalization Rate for one of your rental properties in QuickBooks. This uses the Sample Data File included in our training course.

Step 1. Find the value of your property. Check the Chart of Accounts for the property’s value. Since we keep depreciation in a separate contra-account, you can grab the value that you see without adjustment. Here we will compute the cap rate for a duplex, 3304 Covenant.

The value is $90,000.

Step 2. Go to the Reports menu and choose the LandlordAccounting.com memorized reports menu. Choose profit and loss by class and filter to only show the 3304 class and sub-classes.

The Net Adjusted Income for this property is $8,362.57.

Step 3. Calculate the Cap Rate. In our example that is $8,362.57 / $90,000 = 9.3%.

Questions? Contact us, or leave a comment below. Want to quick start your real estate investing? Purchase our full training today, with a money back guarantee.

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Return to the blog for more articles on QuickBooks landlord accounting and real estate investing.

How to Import the Sample and Template Company File (QuickBooks for Mac)

Previously, we explained for Windows users how to import the training files you purchased. Now, we break it down for landlords using the Mac version of QuickBooks. Use the online edition? Read those instructions.

Step 1. Download the data files from the members only area.
mac download landlord accounting files

Step 2. Open QuickBooks for Mac. Choose to restore a backup file.
mac step 1 - restore quickbooks file for landlords

Step 3. Choose where to restore the file. You can browse to a different location so that it saves the file in a nicely organized place for you.
mac step 2 - restore quickbooks file for landlords

Step 4. Confirm that you are going to restore a backup file.
mac step 3 - restore quickbooks file for landlords
It will confirm that you restored the file, and offer to show it in Finder.
mac step 4 - restore quickbooks file for landlords

Great, you’re done. Now the Company file opens up, and you can begin exploring in QuickBooks. We hope you find this helpful for managing your rentals in QuickBooks.
mac opened company file landlord accounting

If you want to understand more, feel free to contact us. Impatient? You can buy our full training with hundreds of pictures explaining everything.

How To Import the Sample and Template Company File (QuickBooks for Windows)

Great, you just invested in learning to use QuickBooks for landlords. The following instructions show exactly how to import the company file for QuickBooks 2012 on Windows. The instructions are essentially the same for all other year’s versions on Windows. Mac user? Read the Mac instructions for landlords. Online user? Read those instructions.

Step 1. First, make sure QuickBooks is installed. Start the program. Close any existing company files you have. File > Close Company File…

Step 2. Download the files in our members only section with the login you received upon purchase.
members only area
Take note where you save these files.

Step 3. Restore these backups. Click the button or use the File menu to open the file.
step 0a - open or restore quickbooks for landlords or:
step 0b - open or restore quickbooks for landlords

Step 4. Choose to restore a backup copy.
step 1 - open or restore quickbooks for landlords

Step 5. It is a local backup:
step 2 - open or restore quickbooks for landlords

Step 6. Browse to where you downloaded the file in step 2, above. Restore one of the files:
step 3 - open or restore quickbooks for landlords

Step 7. You’ll see this screen, click Next.
step 4 - open or restore quickbooks for landlords

Step 8. Now, choose where to restore thihs company file. If restoring the “template file” this could be the demo file we suggest everyone creates, or your actual file. If restoring the “sample company” file, generally it is best to leave the name as the default, so not to confuse it with your company files.
step 5 - open or restore quickbooks for landlords

That’s it. You should then be able to have everything imported into QuickBooks. Now you can repeat this for the template file.

Note, it is possible you see a message about upgrading the company file, if you are restoring a backup from a previous year’s version of QuickBooks. This is the screen you will see, but don’t worry about it. Go through the prompts presented, and Update Now.
step 6 - open or restore quickbooks for landlords

If you want to understand more, feel free to contact us. Impatient? You can buy our full training with hundreds of pictures explaining everything.

Entering Landlords’ Historical Transactions in QuickBooks

If you are starting a new QuickBooks company file for an existing company, you probably want to enter all those old transactions from the company into QuickBooks so that you can track current performance versus the past. For many landlords’ businesses, this is the right approach, and we will present two methods to quickly enter these historical transactions.

But for other businesses (especially the very small) it may make sense to cut over to use QuickBooks and leave historical reporting in your old system (Quicken, Excel, etc). If you create summary reports and some spreadsheets you can get a lot of the benefit of comparison, but less effort in migrating the data.

Forms method to ender historical transactions in QuickBooks

First, you can re-enter every transaction using the forms and windows you would normally. (Create invoices, receive payments, etc.) This is a great way to learn how to enter new transactions into QB’s. We recommend it for everyone to try, even if only to scrap that company file, as you learn much about how to do property management in QuickBooks by entering actual transactions.

If you do this, the order you enter the transactions is important, do it in the following order.

Enter Accounts Receivable in this order:

  1. Invoices
  2. Statement Charges
  3. Cash Sales
  4. Returns
  5. Customer Payments
  6. Deposits of customer payments sales tax payments

Enter Accounts Payable in this order:

  1. Bills
  2. Credits from vendors
  3. Bill Payments

Enter historical payroll txns.

Enter bank and other txns in the following order:

  1. Checks (do not duplicate bill payments)
  2. Deposits (do not duplicate customer deposits) bank fees and transfers
  3. Credit card transactions

Reconcile each bank account for each month as you go. Getting each month perfect will save a lot of time versus having to reconcile many months at once.

Summary journal entry method (“monthly rollup transactions”) to enter historical transactions in QuickBooks

This method is more useful for quickly entering your transactions, but only gives transaction data on a monthly rollup level.

Enter all historical transactions by creating a summary journal entry for each month between the start date and current date. Each entry will have the net impact of the month: rent receipts, maintenance (per property/class), capital investments per property’s asset account, owner draws, etc. You can enter in on the first of the month, for all transactions that happened each month.

Remember, even though this is not entirely accurate, it gives you a granularity that enables year over year monthly comparisons. For some people this is helpful enough, and potentially faster to calculate these net transactions from their old system than enter everything individually.

Reports to verify correct entry of old transactions into QuickBooks.

There are several reports you can run after migrating the data to ensure your new company file has the correct information.

  1. Run a Balance Sheet report as of the start date to verify beginning account balances.
  2. Generate a Profit and Loss report for periods since start date to verify historical transactions.
  3. Create an Open Invoices report and verify accounts receivable as of the start date.
  4. Use the Unpaid Bills report to verify accounts payable details as of the start date.
  5. Verify inventory by running inventory valuation summary report (probably not applicable for rental property companies).
  6. Run the Payroll Liabilities report to verify payroll liabilities detail as of the start date.
  7. Use the Payroll Summary report to check year-to-date payroll transactions.

We hope this helps, remember at Landlord Accounting you can learn more about tracking rental properties in QuickBooks and invest in our training.

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Import Rental Property Chart of Accounts IIF

If you’ve purchased our training, you can take a look at (1) the complete company file with a year of sample transactions (buying, selling, rehabbing, repairing, etc) as well as (2) the empty template file.

But what if you already use QuickBooks and you just want to compare your chart of accounts with our chart of accounts? Simple, contact us and get the IIF file for the chart of accounts.

You can open up IIF files in Excel. Here’s what part of our chart of accounts IIF file looks like.

chart-of-accounts-rental-property-quickbooks-landlords

If you already have a company file, you probably just want to open up this and scan through the listing of accounts we use, and compare it with what you may want to use. You can tell the type of each account with column E. Real Estate Assets is a Fixed Asset account and Earnest Money Paid is an Other Current Asset.

If you see accounts you want in your existing company file (and read along in our PDF ebook to better understand about every account), you can enter them yourself in QB’s, or edit the IIF file and then import it in QuickBooks.

We hope this helps. For more information you can read more in our Landlord Accounting blog.