Setting up a rental
In the last post, I discussed how to buy rental property. This post assumes you have just purchased the property but have yet to rent it out. The key consideration now is to protect the value of your property and maximize the tax deductions you can take.
Valuing the assets
The first thing you must do is let your accountant know everything about the new property. This includes the value of the property itself and any improvements you make to it. This ensures your tax return accurately reflects the costs and depreciable value of the property, maximizing your tax deductions.
Send the HUD-1 statement. This document summarizes the closing transaction, breaking down the exchange into each and every monetary disposition. Some allocations, such as your real estate broker's closing fees, are deductible expenses; however, others, such as appraisal and inspection fees or the cost for running a credit report, are not deductible but add to your basis in the property. Also send a summary of any major improvements and their costs, as these also add to the basis of the property as must be depreciated separately.
Work with an insurance broker to guarantee adequate coverage for the property. This includes the property structure in case of damage or destruction, but it may also need to include commercial liability insurance to protect you in case of injury or a legal claim. No one likes paying for insurance, but you also do not want to expose your personal finances due to a lack of coverage.
Drafting the rental agreement
Work with an attorney to draft a rental agreement crafted to your and your property. A decent attorney can probably poke enough holes in a cookie cutter lease agreement if things go south with a renter. Make sure the lease defines who pays for what in terms of security deposits, utilities, maintenance, improvements, and repairs. Plan for everything. Even if you intend to rent to friends and family only, you still need an ironclad lease in place to clearly define responsibilities to both parties.
Documenting income and expenses
Treat each property like a business and open a separate checking account for each one. Run all of the rental income and expenses through the account and keep a digital file of scanned receipts. This will help ensure you can justify any deductions in case of an audit, and it will also help document any maintenance and repairs you did in case a renter complains.
Even though you hope to only deal with great renters, you still need protections in place just in case. Following these steps will go a long way in not only helping you protect yourself but also feel at ease once your new renters move in to the property.