What income to track
Every dollar flowing into your rental is potentially taxable. Track rent received (including partial payments, late payments, and advance rent), late fees, lease termination fees, pet fees, parking and storage income, laundry income, and any services tenants pay for that you bill. Record when received, not when earned, if you are a cash-basis taxpayer (most individuals are).
Security deposits are the common exception: do not treat them as income when received. Security deposits are income only if and when you actually keep them for damages or unpaid rent — at that point, record the kept amount as income.
What expenses to track
Deductible operating expenses (reported on Schedule E as current deductions) include: mortgage interest, property taxes, landlord insurance, repairs and ordinary maintenance, property management fees, HOA dues, advertising costs, utilities you pay, professional fees (accounting, legal), and your out-of-pocket mileage to the property at the IRS standard mileage rate (check irs.gov each January for the current year's rate). Capital improvements — new roof, HVAC replacement, major renovation — must be capitalized and depreciated, not expensed immediately. The test: does the expense restore, adapt, or substantially improve the property, or does it simply maintain it in its current condition? Maintenance is currently deductible; improvements are capitalized.
Keep every receipt, invoice, and bank statement. When in doubt, save it.
Tools and practices
A dedicated bank account for your rental makes record-keeping significantly easier — all income and expenses flow through one place, and the annual statement is a ready-made summary. Simple options: a spreadsheet with one row per transaction, with columns for date, description, category, and amount, is adequate for one or two properties. Purpose-built rental property software integrates bank feeds, categorizes expenses automatically, and produces Schedule E-ready reports. Regardless of tool, reconcile monthly so year-end preparation takes hours rather than days.
Frequently asked questions
Are security deposits taxable income?
Not when received. A security deposit is income only in the year you actually keep it — to cover unpaid rent or documented damages. If you return it fully, it was never income.
How do I decide if an expense is deductible now or must be depreciated?
The IRS tangible property regulations use three tests: betterment (does it make the property materially better?), restoration (does it return a major component to working condition?), and adaptation (does it change the use?). If yes to any, capitalize and depreciate. If it is ordinary maintenance keeping the property in its current condition, expense it.
What mileage can I deduct for a rental property?
You can deduct mileage for trips to the property for repairs, inspections, meeting tenants, and management at the IRS standard mileage rate. Keep a contemporaneous log: date, destination, and purpose for every trip.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.