Owning residential rental property in Arizona—whether it's a long-term lease in Gilbert or a seasonal short-term rental in Scottsdale—is an excellent investment strategy. However, reporting that income accurately on Schedule E (Supplemental Income and Loss) requires meticulous record-keeping throughout the year to ensure you are maximizing depreciation and deducting eligible expenses.
Schedule E Income Documents
To accurately report your revenue, you must provide:
- Form 1099-MISC from your property management company (if applicable).
- Form 1099-K from short-term rental platforms (like Airbnb or VRBO).
- A spreadsheet or ledger showing all gross rents received directly from tenants.
- Records of any portion of a tenant's security deposit that was kept because they broke the lease.
Critical Expense Documents
Rental properties offer numerous allowable deductions that lower your taxable rental income. Please gather receipts, statements, and totals for:
- Mortgage Interest: Form 1098 from your lender.
- Property Taxes: Records of real estate taxes paid during the year.
- Insurance: Premiums for hazard, landlord liability, and flood insurance.
- Repairs vs. Improvements: Receipts for fixing a broken pipe (repair, deducted immediately) versus replacing the entire roof (improvement, must be depreciated over time).
- Utilities: Water, trash, or electric bills paid by you, not the tenant.
- Management Fees: Fees paid to property managers or HOA dues.
The Depreciation Factor
If this is your first year renting a property—or your first year working with me—I will need the closing disclosure (HUD-1) from when you purchased the property, and the current property tax assessment. We must separate the value of the land (which cannot be depreciated) from the value of the building (which can be depreciated over 27.5 years).