Rental Property Bookkeeping: How To Do It Right (and Why It Matters)
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If you own rentals - maybe a duplex in Van Nuys and a single-family in Santa Clarita - you need to track income and expenses for each property separately. Even if they're all in the same LLC, you want clean books per door. Here's why it matters and how to set it up so you're audit-ready.
Why "Per Property" Isn't Optional
Each rental is its own economic activity. Under the passive loss rules, each rental property is treated as a separate activity by default. You can elect to aggregate them, but without that election, they're separate. The tax code is clear: "This section shall be applied as if each interest of the taxpayer in rental real estate were a separate activity. Notwithstanding that, a taxpayer may elect to treat all interests in rental real estate as one activity."
Short-term rentals throw another wrench into things. They can be treated as non-rental "trades or businesses" under the 7-day average-use rule, which means you need per-property tracking so you don't accidentally mix STR results with long-term rentals and screw up your loss characterization. Treasury regs say activities where the "average period of customer use does not exceed seven days" are not rental activities.
If you're using the 199A safe harbor for rental real estate, you're also expected to keep separate books and records per rental real estate enterprise. Residential and commercial properties generally can't be lumped together. The regs specifically say: "Separate books and records are maintained to reflect income and expenses for each rental real estate enterprise," and "residential real estate may not be part of the same enterprise" as commercial.
The Duplex + Single-Family Example (Van Nuys + Santa Clarita)
Let's say you own:
- A duplex in Van Nuys with two long-term tenants
- A single-family in Santa Clarita you rent mid-term to traveling nurses
- Maybe an STR cottage you rent out on weekends
How to set up:
Open a separate class, location, or property file for each address in your accounting system. Tag all inflows (rent, deposits released to income) and outflows (repairs, property tax, insurance, mortgage interest, utilities, management fees) to that specific property.
For shared costs like portfolio insurance, allocate by a reasonable method - square footage, number of units, insured value. Document whatever method you pick and keep it consistent.
Why it matters:
Passive loss rules apply per activity. Losses on one property don't automatically offset income on another if they're not grouped - and grouping has rules and elections.
If the Santa Clarita house had any personal use or turns into a mixed-use situation, § 280A limits deductions to rental income with carryforward mechanics. You have to allocate expenses between personal and rental days. The code says: "In the case of rental use where the dwelling unit is used by the taxpayer during the taxable year as a residence, the deductions shall not exceed gross income over deductions otherwise allowable and deductions allocable to the rental activity."
STRs vs. Standard Rentals: Not the Same Rules
The 7-day rule
If average guest stays are 7 days or less, it's not a "rental activity" under § 469. That means losses may be non-passive if you materially participate. This is a big deal - well-kept STR books can unlock current-year loss deductions instead of making you wait.
The regs spell it out: "The average period of customer use for hotel rooms does not exceed seven days. Accordingly, they are not treated as rental operations."
Material participation still applies
For STRs treated as non-rental, you need to meet one of the material participation tests to make losses non-passive - regular, continuous, substantial involvement. Track your hours and tasks.
Mixed/short personal use brings § 280A into play
If you or family use the property personally over the limits (greater of 14 days or 10% of rental days), your deductions are capped to rental income and must be allocated by days.
The "Masters exemption"
If you rent a property for less than 15 days, the income is tax-free - but you get zero deductions tied to that rental period. "If a dwelling unit is rented for less than 15 days, no deduction because of the rental use shall be allowed, and the income shall not be included in gross income."
What To Track Per Property (Checklist)
Income:
- Rent received, prorated first/last month rent, forfeited deposits (when earned)
- 1099-K/airbnb income - tie out bank deposits to lease schedules
Operating expenses:
- Repairs vs. improvements (capitalize big-ticket items)
- Utilities, HOA dues, property management, advertising, leasing fees (deduct same year)
Carrying costs:
- Mortgage interest (Form 1098), property taxes, insurance
Depreciation:
- Cost segregation if appropriate; keep improvement detail by in-service date
Occupancy and days:
- Rental days, vacancy days, personal days per property for § 280A allocations
STR participation log (if applicable):
- Hours, dates, who did the work, and task descriptions. This also lines up with the 199A safe harbor recordkeeping expectation for rental services. "The taxpayer maintains contemporaneous records, hours, description, dates, who performed the services."
Practical Allocation Rules You'll Actually Use
Mixed-use property example:
If the Santa Clarita house is used 30 personal days and rented 270 days at fair rent, allocate shared costs 270/300 to rental and 30/300 to personal. Mortgage interest and property tax remain deductible under §§ 163/164 but are limited by other rules. Operating expenses and depreciation face the § 280A income cap when there's personal use.
Repairs during personal stays
Repairs during personal stays are not "rental days." The regs tell IRS to issue guidance on when repair/maintenance days don't count as personal use. Rule of thumb - be working substantially all day. Document it.
Sample Record Template (Repeat for Each Property)
| Property | Income (Rent) | Key Expenses | Days Rented | Personal Days | Notes |
|---|---|---|---|---|---|
| Duplex – Van Nuys | $X | Taxes, Insurance, Repairs, Utilities | 365 | 0 | Long-term tenants |
| SFR – Santa Clarita | $Y | Taxes, Insurance, Repairs, Mid-term Leasing Fees | 300 | 30 | Mixed-use; § 280A allocation |
| STR Cottage | $Z | Cleaning, Supplies, Platform Fees, Utilities | 120 | 0 | Avg stay 2 nights → Non-rental; track hours |
How This Plays on Your Tax Return
Passive vs. non-passive:
Standard long-term rentals are passive by default. Losses generally carry forward unless you have passive income, qualify as a real estate professional, or you use the $25,000 active participation allowance (subject to phase-out).
STRs with 7-day or less average stays are not "rental activities." If you materially participate, losses can be non-passive. Keep a participation log.
Real estate professional (REP) rule:
If you qualify, you may elect to group all rental interests and treat them as one activity, which can unlock current-year losses. But the grouping is an affirmative election and has ongoing implications.
199A (qualified business income):
If you rely on the rental real estate safe harbor, keep separate books and meet the rental services hour requirements. Properties used as a residence during the year or under triple-net leases are excluded from the safe harbor. "Real estate used as a residence for any part of the year under section 280A is not eligible for this safe harbor. Real estate rented under a triple net lease is also not eligible."
Audit and Substantiation Realities
The IRS expects contemporaneous records - books per property, participation logs for STRs/REP, and expense support. If you can't substantiate, deductions die.
If you do have personal use, expense caps kick in. Track days precisely. "A taxpayer uses a dwelling unit as a residence if personal purposes exceed the greater of 14 days or 10 percent of rental days."
Legislative Check
Based on our latest review, no recent federal legislation changed the per-property recordkeeping expectations or the STR 7-day rule, the § 280A residence limitations, or the § 469 separate-activity default for rentals. Always verify in case Congress moves late in the year.
Conclusion
Keep separate books per property. It's cleaner for § 469 activity tracking, required for the 199A rental safe harbor (per enterprise), and essential if an STR is in the mix.
STRs with average stays of 7 days or less are not "rental activities." With material participation, losses can be non-passive now - not someday.
Mixed personal use triggers § 280A: allocate by days, income caps apply, document everything.
Need a hand setting this up or want us to review your per-property books? Reach out - we'll tailor it to your properties and your filing strategy.
In Essence
Track every rental by address - income, expenses, days, and your time. Long-term rentals, STRs, and mixed-use properties all have different rules. Clean, per-property books keep you compliant and unlock deductions.
If you need any help tracking all this, reach out and we'll take a look at your situation.
