Rental Property Tax Deductions You Need to Know About

Dominique Swanson

By Dominique Swanson

Jun 18, 2024

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Investment properties are a lucrative way to generate rental income. However, as a landlord, you know well that a host of expenses come along with owning a rental. All income from your rental property must be included in your gross income amount on your tax return, which includes more than just what your tenants pay you in rent. Thankfully, you can write off many of the costs of running your rental property.

Here are four rental property tax deductions you should be taking advantage of.

Mortgage Interest

If you have a loan on your rental property, you can deduct any interest paid to the lender on that loan. This tax benefit is offered to rental property owners since the property is a business expense, and not for personal use. You can report this expense on the Schedule E form of 1040, which is used to collect information about income earned or lost through real estate investments. You may need to reference your 14098 Mortgage insurance statement and property tax statements while completing this form.

Property Depreciation

It isn’t uncommon for your property to depreciate over time, which means it becomes less valuable year over year. Because the wear and tear to your property reduces the overall value, you’ll want to take advantage of this deduction so you can reduce your taxable income. The IRS estimates that a rental property reaches the end of their lifespan after around 27 and a half years, which is the span of time you can deduct depreciation for your property. Those 27.5 years are considered the properties useful life expectancy. The useful life of an asset considers the number of years it is likely to generate cost-effective revenue. However, only the building depreciates, not the land.

Operating Expenses

This includes a variety of necessary expenses incurred to keep your rental business running, such as utilities, advertising, legal fees, insurance premiums, professional services, hiring vendors or employees, and other property management fees. When hiring employees, vendors, and independent contractors, be sure to collect their W9 form so you can prepare information returns for taxes. Come tax time, you can submit the amount paid on IRS form 1099-MISC if the expense was over $600 for the year. Missing forms could result in penalties and fines from the IRS.

Maintenance and Repairs

The cost to do necessary repairs (changing light bulbs, patching holes, fixing leaks, etc.) is usually fully deductible in the year during which the cost is incurred. This is only true for repairs, as capital improvements are depreciated every year. If you misclassify repair costs on your tax return, you could be raising a red flag to the IRS. Improvements fall under any amounts paid for the betterment of the property, such as updating A/C systems, adding new carpeting, investing in new landscaping, or upgrading the appliances. You can still recover some of the improvement expenses by filing for depreciation.

What isn’t deductible?

Not all rental property expenses are deductible, unfortunately, and it’s important to know what will and won’t fly when filing your taxes:

  • Uncollected rent. Any rent payment that is in collections or never paid by the tenant is not considered deductible.
  • Lost income. You cannot deduct lost rent due to vacancies in your residential rental property.
  • Personal expenses. Any expense personally incurred, such as gas used to travel from home to work, is not considered a deductible expense. You can, however, deduct travel expenses for business-related purposes, such as plane tickets for a business trip.
  • Fines. Any fines you incur, such as violations of local laws or codes, cannot be deducted. For example, if the city inspects your rental and finds it is not in compliance with city ordinances and they fine you, you cannot deduct that expense. However, if you incur costs fixing the issue, such as making necessary repairs to meet compliance standards, that cost may be deductible under Maintenance and Repairs.

The Bottom Line

Maximizing the tax deductions for your rental property requires careful planning and meticulous record keeping, but if done correctly, can offer huge savings. By leveraging the deductions available to you, you can significantly reduce your taxable income and enhance profitability. With the right strategy and the help of a tax professional, you can make your rental property even more financially rewarding.

Note: For financial advice, we recommend you contact a tax professional to assist you with tax preparation. This article is simply an overview of potential deductions.

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