By using the Quicken software for this recordkeeping, you can prepare summaries of income and expenses by property for monitoring your individual real estate investments. You can also easily complete the Schedule E income tax form you use (or make it easier for your tax accountant to prepare your Schedule E tax form).
Moreover, if you set up asset accounts for each of the individual real estate properties you hold and then use these to record both capital improvements and any depreciation, you can easily calculate any gains or losses stemming from the sale of a piece of real estate.
This short discussion, therefore, describes the basics of how you do this in any version of the Quicken software. However, an important note: If you have the budget and can use the Quicken Rental Property Manager program (the most expensive version of Quicken), you don’t need to follow the instructions given here. You can simply use the Rental Property Manager’s wizards to step you through the process.
Describing Your Real Estate Holdings
To track income and expense by individual real estate property, you need to do two things:
- Set up the income and expense categories needed to describe this income and expense. You should use the same income and expense categories that show on your Schedule E tax form.
- Set up a class for each individual real estate property, and then, whenever you categorize an income or expense item for a particular property, identify the property by providing the class. (Note that if you have only a single real estate investment and you know for certain that you’ll never add another real estate investment to your portfolio, you don’t need to set up classes.)
Both tasks are described in the paragraphs that follow.
Setting Up Categories for Real Estate Investments
Depending on what you told Quicken when you installed it, Quicken may already have the categories you need on its category list. However, if Quicken doesn’t already have the categories you need, you easily add them.
To set up categories for tracking the income and deductions related to your real estate investments, start Quicken and follow these steps:
- Choose the Lists → Category List command to display the Category List window.
- Click the Add Category command button to display the Set Up Category dialog box.
- Use the Category Name text box to provide a brief name for income or deduction item. For example, if you’re setting up a category to track a property manager’s expense, you might use the category name “Manager.”
- Use the Income or Expense option button to mark the new category as one that tracks either income or expense.
- If you need to describe the category in additional detail, use the optional Description text box.
- Click OK. Quicken adds the new category to the list shown in the Category List window.
Repeat steps 2 through 6 for each income or expense category you’ll use.
Setting Up Classes for Real Estate Investments
To set up classes for your real estate investments, start Quicken and follow these steps:
- Choose the Lists → Class command to display the Class List window.
- Click the New command button to display the Set Up Class dialog box.
- Use the Name text box to provide a brief name for the real estate property. For example, if you’re setting up a class for a rental property and the property has the name “Winston Apartments,” you might shorten this to “Winston.”
- If you need to describe the property in more detail, such as noting the street address, use the Description text box.
- Click OK. Quicken adds the new class to the list shown in the Class List window.
Repeat steps 2 through 5 for each real estate property you’ll track as an investment using Quicken.
Setting Up Subclasses for Real Estate Investments
You might also want to set up subclasses, which are simply classes used to classify the components of a class, for your real estate investments. For example, if you set up a class for Winston Apartments but want to separately track income and expenses related to a certain type of tenant, such as low-income tenants, you could create two subclasses: “Qualified,” for tenants who qualify as low-income tenants, and “Nonqualified,” for tenants who don’t qualify. (You might need to do this, for example, if you’re claiming federal low-income housing credits for a property and therefore need to track tenants by class, too.)
To set up a subclass, you take the same steps you use to set up a class. Keep in mind, however, that you can use only 31 characters to enter categories, subcategories, classes, and subclasses. All this information goes into the Category combo box, so use short names. For example, suppose you rent some apartments to qualified low income tenants in order to meet either local or federal requirements. In this situation, you might use “Qual” and “Nonq” for Qualified and Nonqualified.
Warning: Quicken lets you use subclasses and classes interchangeably. You can use a class as a subclass and a subclass as a class. Therefore, if you do choose to use subclasses, you need to be more careful in your data entry.
Tracking Income and Expenses by Property
Once you’ve set up classes for each of your individual properties, you’re ready to begin tracking income and expenses by property. To do this, simply enter both the income or expense category and the class name in the Category text box, separating the category from the class with a slash.
To record a rent check from one of your Winston Apartments tenants when “Rental Income” is the income category and “Winston” is the class name, for example, type “Rental Income/Winston” in the Category combo box.
If you’ve used subclasses, such as “Qual” and “Nonq” to identify tenants as qualified and nonqualified (low-income) tenants, follow the class name with a colon and then the subclass name. To record a rent check from one of your Winston Apartment “qualified” tenants when “Rental Income” is the income category and “Winston” is the class name, for example, type “Rental Income/Winston:Qual” in the Category combo box.
Classes can be a little tricky for a couple of reasons. You can flip-flop the classes and subclasses because Quicken doesn’t track your classes and subclasses separately. From its perspective, they’re both the same. And you can’t tell Quicken to always remind you to enter a class, which you can do for categories. So be careful to always use classes and subclasses, and if you find that a report shows unclassified amounts, use QuickZoom to locate the unclassified transactions you need to fix.
When you want to print an income and expense report by property, produce the Job/Project report, by choosing Reports → Business → Job/Project and then clicking the Create button.
Setting Up Real Estate Investment Accounts
You can use Quicken accounts to track the adjusted cost basis of individual real estate investments. You calculate the gain or loss upon sale by subtracting the adjusted cost basis of a property from the net sales price.
To do this, set up a Quicken asset account for individual real estate properties. Whenever you make an improvement to the property, record the improvement as an increase in the property’s balance. Usually, the easiest way to do this is to just categorize the check you write to pay for the improvement as a transfer to the house account.
You can also record the periodic depreciation you’ll use for calculations of the taxable profit or loss on the real estate investment. To do this, first set up a depreciation expense category, such as “Depreciation.” Then record an annual depreciation expense transaction that decreases the property’s account balance. To record a depreciation on Winston Apartments when “Depreciation” is the expense category and “Winston” is the class name, for example, type “Depreciation/Winston” in the Category text box.
If you’re interested in learning more about using Quicken, feel free to contact us.